Inflation has been such an ingrained element of most major economies for so long it is assumed to be the normal state of affairs. Certainly, central banks and governments would like that to be the case and most of them are making vigorous efforts to get back to a situation where inflation is running at 1% to 2%.
This is mainly being done through Quantitative Easing (QE) in which governments simply invent money by printing more of it. The scale of this is truly staggering, albeit hard to quantify but seems to be about $4.5 trillion in the US, £375 billion the UK, €360 billion Europe and ¥240 trillion in Japan.
Despite this QE hasn’t worked. Growth is low in these major economies, even after six years of this stimulus, and inflation is either zero or barely positive. The only bright spot had been China which had been growing at double or high single digits for over a decade.
However, even here recent events suggest that its own, hard to measure stimulus from large scale borrowing is having less effect and it has now resorted to devaluing its currency to stimulate growth to make exports cheaper. Lower prices from cheaper white goods and other manufactured products will, effectively, export deflation to the West by undercutting competitors. Good news perhaps for commodity producers if not for washing machine repair men and economic growth in those countries.
This new development is happening when the economic recovery in the UK is already six years old (which is longer than normal) and interest rates are still at rock bottom. That means central banks can’t cut rates to tackle this new threat and governments may be reluctant to restart QE.
Outright deflation may now occur despite all the efforts to prevent it.
If deflation does happen should investors adopt different strategies? An obvious answer is to buy fixed income which will at least preserve capital values, as cash becomes more valuable, even if the return is miniscule. Investors need to commit a lot of capital to get a reasonable income. Conversely, low interest rates might mean debt is superficially cheap for borrowers, in nominal terms, but in real terms, when the value of money is rising, deflation makes debt repayment harder. This is the opposite of what has…
The BoE website says:
Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds.
Surely it is semantic to argue that "creating" is diferent to "printing"?
