12 August 2010
BIG PICTURE: 12th August, 2010 22:48
So where are we with the world economy? Are we heading for deflation, or are we heading or inflation?
The answer is that the only way out of this is through inflation. Governments face various constraints:
a) high debt, meaning high debt repayments, meaning further stressed cash flows (and positive feedback thereafter)
b) significant restrictions on the ability to decrease spending. I remember talking to one Minister of Finance once, who told me that his ability to do things is greatly overestimated. Pensions, salaries of people on the budget, all these are often not only controlled by fear of strikes and revolt, and of course losing elections, but often by law itself, and frankly I cannot see how opposition parties would support a law change in the good of the country, when opportunistically they face a real possibility of capturing (or recapturing power).
This leaves inflation as the only way to not only correct the valuations, but also to decrease the wages in real terms. Surely BAA which passed the right to Strike today is not happy about the wage freeze, yet if they were to be compared to the wages of the airport staff in Shanghai, their approach to having a 'walk out' could have been different. Even Econ 100 student knows that wages are sticky.
This leaves one way inflation.
The tricky question however is at what point does the balance turn, for just as with ecosystems, also with the economy - there comes a moment when the debt becomes unsustainable. Due to different cost of funding, and due to differences in market perception, these levels are different for various countries, with US,being a safe heaven clearly having the advantage here. Yet, even the safest of the heavens are vulnerable.
Time will come... but when? Japan is fighting with deflationary pressures for over 20 years. Without Velocity, there is no P (inflation). Could it be that there will be no V?
