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The Death Of Deflation In The Central Bank Era
At a global aggregated level deflation has been non-existent over the last 80 years. Prior to the twentieth century, Deutsche Bank notes that years of deflation were almost as common as years of inflation. However this all changed over the last 100 years or so as global currency links to precious metals broke down periodically and then collapsed as of 1971. Furthermore, since then inflation has had an upward bias relative to most of prior history, and as such, Deutsche warns, the longer-term investor has evidence that they must approach the current low levels of bond yields with extreme caution.
Via Deutsche Bank,
Future inflation is clearly crucial to understanding the future performance of assets and the health of underlying economies. It is also critical to working out whether bond markets are in a bubble or simply reflecting low activity including low inflation.
Looking at the results so far it’s a measure of the level of intervention of central banks since the GFC that nominal yields are close to all time lows in many countries whilst inflation is at more ‘normal’ levels for most countries, albeit starting to get very low in some. Looking forward, given that we live in a fiat global monetary system (and have done since the Bretton Woods regime effectively collapsed in 1971), there is no theoretical constraint on money creation. Since 1971 inflation has had an upward bias relative to most of prior history where the most common system was some kind of precious metal currency peg. In particular deflation should be very rare in a fiat currency system, especially with modern day high levels of debt as central banks would likely be forced to intervene if there was the threat of a run on a country’s debt due to any deflation risk and implied solvency issues. The peripheral of Europe is slightly different in that individual countries have lost control of their own monetary policy. However even here the ECB is unlikely to allow deflation to persist for major economies for fear of debt funding problems and damaging contagion to the wider euro area project.
Figure 11 illustrates the positive inflation bias seen in the modern era by showing the percentage of countries (in our progressively increasing sample of up to 103 countries) with negative annual YoY inflation through time (back over 200 years). Before the last 70 years it was quite common to see periods of annual deflation for over 50% of countries in the sample. Over the last 40-50 years this number has rarely been above 10% of the population.
At a global aggregated level deflation has been non-existent over the last 80 years. Figure 12 uses the same gradually increasingly cohort as analysed above but shows the median global YoY inflation back to 1210 (left) and over the shorter period since 1800 (right).
Prior to the twentieth century, years of deflation were almost as common as years of inflation. However this all changed over the last 100 years or so as global currency links to precious metals broke down periodically and then collapsed as of 1971. Indeed we haven’t seen a year of deflation on this median Global YoY measure since 1933, meaning we’ve now had over 80 years without a global year on year fall in prices even if the annual rate of inflation has been falling fairly consistently since the mid-1970s.
The point being that the longer-term investor has evidence that we live in a world with a positive inflation bias and as such must approach the current low levels of bond yields with extreme caution.
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Absolutely, Doochebank. The only other thing missing from the last however many years from which you mindlessly extrapolate your inflation/deflation patterns is that when before, tell me nicely, pretty please with coupons and principal payments on top, have we been in a Liquidity Trap?
Huh? Huh? Huh?
I was once in a Liquidity Trap... piece of advice! You can have a plus sized girlfriend or you can have a water bed, but under no circumstances can you have both at the same time...
Or if you do, make sure you know how to swim?
Let me guess.
You were trying to roll her in flour to find the wet spot?
"Roll her" that's a good one, I would need to get my heavy machinery credituals first.
One of my friends had a one night stand with a fat chick who had a water bed. He said when she climbed on top he felt like he was sandwiched between two water beds and started to panic.
If Bondzilla ever wakes up from his ancient nap, it ain't gonna be pretty.
Watch Japan. They go first, then us.
Yep. Yen at 107. There is a number...112 or something...where outright default becomes a fait accompli.
It'll be a preview to the destruction of the US financial system.
Even if it doesn't actually. This is why understanding the difference between deflation and inflation matters (and why it pays to have a good economist on the payroll.). If prices are fall debt isn't expensive..."merely unserviceable."
Inflation benefits those entities first in line for the free money. Gosh, wonder who that might be? sschu
Someone forgot to tell Gold.
Yes and no.
As Japan is still learning, you can force insurance companies and pension funds to buy the least awful paper available. You can't force people to buy over priced real estate.
The thing about bubbles is that they are very expensive.
In the end "we're all long recovery." So where is it?
"At a global aggregated level deflation has been non-existent over the last 80 years."
Yet Japan deflated. Yet the Nasdaq and housing bubbles deflated. The sovereign debt bubble has yet to deflate. The story has not completed, yet.
Good points.
We also have not factored in Mr. Ebola.
Ebola! YES! Thanks Kaiser!
Ahhh, my ebola fix for the day. I was getting anxious.
They can print all the money they want. But they still have to get it out the door.
In a fiat monetary system, deflation is a myth. What's so hard about that to understand?
Nothing. TPTB need to keep the mob quiet. That's all.
We would have had deflation if the Oligarchy had not forced the governments to buy thier collapsed assets at par.
Some people are still sitting in their mcmansions here more than 5 years after The FED started sucking up defaulted mortgages from the insolvent Too Big To Take the Losses Like Everyone Else.
So given that oil droppped 15% in a about a week does that mean that dooshbank is full of shit?
Just saying.....
Germans always see inflation. It's got sumting to du with der anal retentativeness
Kaiser Merkel farted today and cleared the room thus causing deflatulent episodes to occur throught the reichstag....
I am sure the reduction in deflation occurrences is just a coincidence given that deflation is bad for Banksters and they got total authority in 1913
I've been rereading a couple of books on economic history and I've notice three things in the last 300-400 years 1) somebody had a great idea 2) it involved paper money 3) it never worked out. But this time is different of course since everybody is sooo much smarter now, just ask Paul Krugman.
Deflation?
We talk now about the manipulated, or about the real one?
Well, I got news for them, continuing to pad the millions and billions of the 1% will not lead to inflation. They only need so many houses and toys, and no matter how rich you are, you can only eat so much food and wear so many clothes. Inflation and deflation is propagated by the masses, and the masses are getting poorer by the day. Inflation requires growth to propagate through the masses, and there is none.