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.