Investors should be afraid of inflation ?

The process of money creation mass was awakened by the memory of the warning from the great economist Milton Friedman, for that if you create more money, it is

Investors should be afraid of inflation ?

The process of money creation mass was awakened by the memory of the warning from the great economist Milton Friedman, for that if you create more money, it is

TheEditor
TheEditor
03 mart 2021 Wednesday 10:39
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Investors should be afraid of inflation ?
The process of money creation mass was awakened by the memory of the warning from the great economist Milton Friedman, for that if you create more money, it is as much excess demand that you feed which will drive up consumer prices. INGRAM / PHOTONONSTOP / INGRAM / PHOTONONSTOP

Almost everything in the world of investments, now depends on the future of inflation : the rate of interest, of course, but also the valuations in equity markets, and certainly the fate of some 18 000 billion euros of sovereign debt to rate negative. However, for the first time in more than ten years, this future concern.

The last time such a fear had been a concern to investors dates back to 2009, when the major central banks had inaugurated the practice then revolutionary of the "Quantitative Easing" [" easy money "], consisting of to support economic activity not only in lowering the interest rates, but also the printing of currency to buy back the banks with the government bonds they hold.

This money creation mass had then woken up in the remember the warning from the great american economist Milton Friedman (1912-2006), for which, if you create more money, it is as much excess demand that you feed which will drive up consumer prices.

After ten years of this regime, not only the inflation did not rise, but she has continued to decline, to the point of fear, on the contrary, a risk this time of slow descent into deflation. The created money, failing to truly be introduced by the banking system in the economic circuits, remained at the level of the financial system (banks weakened and monitored closely were reluctant to lend, and the private sector in general was rather under the pressure of reducing their debt to borrow more).

It is, therefore, mainly the prices of the financial assets has taken advantage of the manna by knowing him, a high inflation. This phenomenon has increased over the decade, the magnitude of the inequalities between small employees and large investors, and has fueled a rebellion growing against the processing logic of an economic problem and the only solution money.

Abandonment of the budgetary orthodoxy

arrived in this context, the syncope of the economic activity in 2020. The banks have once again been manoeuvring to avoid the worst and the financial markets have again benefited. But the governments, with the blessing of the central banks, have this time crossed the Rubicon : they have abandoned any claim to the budgetary orthodoxy and, at the price of deficits and debt without precedent, have taken it upon themselves to directly subsidize the private sector has been undermined by the decisions of containment.

The currency, always at the origin provided by the central banks, this time remains in the single financial system, but has also found the path to the cash flow of the companies and the investors (the perception of income, even if they are diminished, without much opportunity to spend has pushed the savings rate of the average consumer, even if the gap between the extremes remains immense).

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arise, therefore, two questions.

The first is relatively short-term : when economies will re-open to the favour of vaccination sufficiently large populations, the savings will not feed a catch-up of the desire to consume, driving prices up and finally giving reason to Milton Friedman ?

This perspective might prove to be even more spectacular than the base effect will be very powerful : let's assume that the consumption can be resumed from the second quarter of 2021, the pace of increase compared to the spring of 2020 could be explosive. This scenario is quite plausible.

But it will probably be short-term : not only the weakness of the employment situation and the persistence probability of a general concern are likely to temper the liquidation of the savings, but also, more fundamentally, the consumption of "pending" is that of services (which is what makes this recession is a case in radically different recessions classics). However, the essential services that are not consumed does not catch (we will not go twice to the hairdresser's to the future...).

Redistribution of wealth

The longer-term question is much more formidable. The commitment of governments in 2020 could be perceived as during the regime change that had opened forty years ago the era "Reagan-Thatcher" withdrawal of the State, lower taxes, regulations, and, in the case, inflation. The likelihood of this possibility is very clearly enhanced by the change of rulers that eventually comes to be recognised at Washington.

The administration Biden, and especially in her breast, Janet Yellen, in the essential function on this subject the secretary of the Treasury, has embarked on a program designed specifically to reduce inequality by redistributing wealth to the wages through, among others, taxation. The commitment towards a greener economy is very strong and probably just as much justified, but it is also potentially inflationary, this time not by increase of the demand, but by rising costs. The shadow of revenge on "Wall Street" would emerge from it ?

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A deflationary trend of forty years (or even ten years, if you don't want to go back to 2009) will not be reversed in a day. The deflationary forces of technology, demography, over-indebtedness remain powerful. Rome has not changed regime immediately after the troops of Caesar had crossed the river.

But the back of the governments after their abandonment of the budgetary orthodoxy in 2020 will be difficult in the context of a popular pressure became very high. The markets could begin as early as this year to anticipate a change of regime that is heading to more growth, but less margins and freedoms for the business, more income, but more inflation for the employees. And certainly a lot more complexity for investors.

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Updated: 03.03.2021 10:39
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