Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Stagflation versus inflation

It was inevitable that inflation would also occur in the consumer price index (CPI). Before, it caused substantial price increases in assets (eg, houses). Remarkably, asset price inflation is typically viewed as a (paper) profit rather than as inflation. To a large extent, this is because of the CPI methodology and accounting rules.

The main culprits are (i) the ginormous increase in money supply (eg, quantitative easing, pandemic stimuli like CARES Act), and (ii) interest rate reductions by Central Banks (eg, ECB, Fed) since the financial crisis of 2007-2008 and subsequent economic crisis. Hence, an overabundance of cheap money.

Today, we have the (very) weird combination of high inflation (eg, 7% in USA and about 5% in Europe) and negative interest rates. Hence, we are getting “poorer” by the day. Often, this is a reason for spending now rather than next week. Not this time. Everyone feels something will hit us and hard (eg, 2015 video).

For a long time, I’ve been worried about a new Great Depression like in the 1930s. Perhaps, there’s even a worse possibility: decades of stagflation, like the Lost Decades in Japan (1991-onwards).

At least, the Fed has started fighting inflation and has promised tapering of the excessive money supply. The ECB president acts more like a politician (which she was) than as a responsible custodian. It may not matter anymore as it seems hardly possible to deflate the excessive Central Bank balance sheets.

Moreover, the Japanese situation has learned that politicians will continue with economic stimuli in order to break stagflation. Actually, this habit will worsen and lengthen the period of stagflation. Originally, the Lost Decades referred to 1991-2001. Today, it refers to the period of 1991-2021 (and onwards).

A period of high inflation, negative interest rates and citizens getting “poorer” by the day, is likely to fuel civil unrest. I’m hesitant to compare today with the final days of the German Weimar Republic (1918-1933). Nevertheless, nationalist leaders are ready to leverage on this civil unrest in order to gain power.

Rest assured, this is not conspiracy thinking but a mere consequence of the infinity of human stupidity. It’s a miracle (to me) that we have come so far, despite the abundance of human stupidity. To be continued.

I Want You to Want Me (1977) by Cheap Trick
artists, lyrics, video, Wiki-1, Wiki-2

Note: all markings (bold, italic, underlining) by LO unless stated otherwise.

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