The deflationary forces within the global economy are now beginning to overpower the inflationary ones. If they are allowed to gain momentum the result will be a protracted global recession/ depression.
In order to prevent this, global governments will once again resort to their only “painless” option, which is to print money, lots of it.
Inflation vs. deflation
Arguably the two most powerful forces at work in the global economy and financial markets are that of deflation and inflation.
The deflation is a natural consequence of the bursting of the global credit bubble which was 20+ years in the making, while the inflation is coming from global governments and central banks as they attempt to prevent the process of deleveraging (paying down debt).
The forces of inflation and deflation
For some time now these macro forces have been doing battle, however it is those of deflation that are currently winning. Here, for example, are just some of the stories making the news today:
- The UK economy shrank by 0.3% in the first three months of the year, more than previously estimated
- UK inflation falls to lowest in two years
- UK retail sales fall sharply
- Economic activity in the Eurozone shrinks at fastest pace in almost 3 years
- China’s factory output slows
- China’s money supply falls dramatically
- German manufacturing contracts
- Fitch downgrades Japan two notches
- US factory activity slows
Whereas inflation reduces the value, or purchasing power, of money and credit (debt), deflation actually increases the value of money and debt. Therefore deflation makes the servicing, and repayment of debt increasingly difficult.
Ultimately printing money will make the problem worse (you can’t solve a debt problem with more debt), but governments both here in the UK and around the world simply aren’t prepared to let nature run its course.
“Printing money is the last resort of desperate governments when all other policies have failed.”
These were the words of Britain’s Chancellor, George Osborne, back in January 2009. He did also say that quantitative easing “can’t be ruled out as a last resort in the fight against deflation” and that is the threat he and his counterparts face today.
Because deflation is so destructive to those with huge, unsustainable debts – which describes virtually all the G20 nations – it will continue to be countered with unprecedented money printing (Quantitative Easing) and bailouts.