By Bilal Hafeez 09-08-2019

The Great Inflation Delusion (Dr. Ed’s Blog, 4 min read)

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The deflation plaguing Western economies in recent years is much discussed. This piece by Ed Yardeni, a Wall Street veteran and Chief Economist, argues that Central Bankers are fighting for a lost cause because deflation is structurally driven by what he defines as the four D’s. Détente, which is a post-war period of competition and globalization that organically drives prices down; Disruption – accelerated technology advancement is highly deflationary, and there is plenty of incentive for it because it drives down costs; Debt – the crash of the 2008 credit bonanza was clearly a deflation contributor too, now disrupted by dovish monetary stances; and finally, Demographics – Yardeni blames the geriatric trend present. People are living longer and having fewer children, which accumulates more debt, which suppresses growth and is inherently deflationary.

Why does this matter? More and more researchers are claiming that Central Bankers are getting it all wrong (we shared Juliette Declercq’s criticism of them in this week’s podcast newsletter). Yardeni, similarly to Williamson in the analysis above, disagrees with the forced expansionary monetary policy. He claims that deflation might be much more of a microeconomic phenomenon. Or maybe deflation isn’t so bad after all or it’s possible that central bankers have run out of tools – or ideas.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)