Ghost inflation

Let us not be afraid inflation. Our economies are still on artificial life support, so the rejection of the stimulus package at this stage may cause catastrophic consequences. As far as real inflation threat for the world economy? Conservative economists and organizations such as the International Monetary Fund and Organization for Economic Cooperation and Development, have different opinions on this matter. IMF and OECD forecasts a very low level of inflation in the next few years. But the former chairman of the Federal Reserve, Alan Greenspan, is concerned about the threat of inflation. Some bond markets also expect a sharp rise in inflation. Whatever the view was not correct, it largely determines the strategy. If the crisis is replaced by inflation, and this remains a major problem to date, the Government will have to cancel the policy to stimulate the economy (to withdraw money) as soon as possible. If the crisis does not retreat, then policies to stimulate the economy will need to maintain or even expand.


Everyone expects the inflation rate. In the period of low inflation that prevailed in the early 90-ies, in developed countries this figure, on average, did not exceed 2.4%. Inflation-targeting central bank, as a rule, hold at 2%. Proponents of monetarism believe the era of low inflation as his greatest achievement. They are proud of skilled work on central banks' management of expectations. But monetary policy has almost nothing to do with. Low level of inflation was triggered by a combination of supply of cheap goods and low demand. Producer prices in Asian countries with low wages have been under strong pressure, and, in turn, the percentage of unemployment in developed countries has reached an average of 5-6%, which is two times higher than in the first postwar decades. Rising inflation, observed before the crisis in 2008, was due mainly to sharp increases in commodity prices.


That is the basis on which today we can speculate about how real the threat of deflation. One of the first consequences of the crisis can be noted decline in capacity utilization compared to the situation 15 months ago: World production fell by 5% since 2008, and the performance of developed countries by 4.1%. Together with the fall in output was expected slowdown of inflation, this is what happened. Annual inflation rate fell in the OECD average of 3.7% in 2008 to 0.5% in 2009. We again observed its growth, mainly associated with changes in commodity prices. In addition, the IMF and the OECD believes that global inflation will be below average in 2008 for several years in other words, the era of low inflation is replaced by the era of even lower inflation.


But what about the massive quantitative easing (printing money)? Since the beginning of the crisis the Bank of England has invested 325 billion dollars in the UK economy, the Fed increased the monetary base to nearly U.S. $ 1 trillion. dollars, and the People's Bank of China has granted loans to a record $ 1.4 trillion. dollars. Only these actions constitute 4% of world GDP. Undoubtedly, this means that inflation is not far off, will not begin until the removal of excess liquidity. For those who have visited a couple of lessons on the quantity theory of money, such a conclusion seems quite substantiated. According to the quantity theory of money, the general price level will increase in proportion to the growth of money supply. Thus, if the money supply has increased globally by 5% last year, world prices would rise by 5% with a slight time lag. But, as never ceased to celebrate John Maynard Keynes, the quantity theory of money applies only under conditions of full employment. If the economy has unused capacity, a part of any increase in money supply will be spent rather on increasing production than the purchase of existing products.


But it's not so bad. By "money supply" experts usually understand monetary aggregate M3, a broad measure that includes bank deposits. Filling of banks with central bank money does not guarantee that the contributions arising from spending or borrowing money, in proportion to increase. In the 90 years the central bank of Japan has invested huge sums in banks, hoping to increase the money supply. In some cases, the increase of the Central Bank reached 35% in the year, despite a measure of M3 grew only 7%. These United States and Europe show that the rate of M3 fell most of 2009, despite unusually low interest rates and quantitative easing. A waste of money, not printing matters. Only when the money is spent, they cease to be a bundle of worthless paper. Any central bank can print money, but he can not guarantee that they will be spent. Money can be accumulated in bank reserves or savings accounts, or may propagate bubbles in asset markets. But in such cases, monetary growth is either very small or completely absent. The new money simply replace the old, which were eliminated during the economic meltdown.


For this reason, according to official figures, in the next few years will experience an extremely low level of inflation, although monetary and fiscal stimulus. This should serve as a warning: to assert that at the present high level of unemployment, inflation will remain low, it means to say that in the next five years, economic recovery will be sluggish. Moreover, after the crisis, the economic recovery is usually paired with a taller than average. This means that prices will be faster than usual. The lack of confirmation of price growth in the process, demonstrates a lack of clear evidence of economic recovery. Economy still in need of stimulation. Refusal of him is tantamount to death. Discussions about the threat of inflation - just intimidation. Instead, think about possible ways of healing. Undoubtedly, different economies at different stages of recovery, and rapid economic growth in some countries such as China and India, will help these countries with weaker economies like Europe and America. But until then, until the next quarter does not appear strong evidence of economic growth, European and U.S. authorities should be ready to accelerate and expand existing expenditure programs. Otherwise, the economies of these countries at risk of getting stuck in a state of crisis.