epitomised by most nancial reporting. Examples of such short logic chains include the following ideas: rising interest rates lead to a weaker economy; an increase in government spending leads to a rise in GDP; or falling commodity prices lead to deation. Short logic chains sound perfectly reasonable. Yet they misrepresent the workings of a complex, dynamic system. The most insidious short logic chain of all is the idea that 'stronger economic activity means higher ination' and its corollary, 'weaker economic activity means lower ination'. Sometimes these statements apply, and sometimes they just dont. Welcome to Duckonomics.
3. Supply-side ination: advanced economies have outsourced the production of goods and services to lowercost producers in other nations. That leaves them vulnerable to ination that arises in producer countries, then passes along the supply chain to consuming nations. Take the quantitative-easingfuelled surge in global food and energy prices in 2010-2011, which triggered high ination in many emerging nations. The local price rise led to higher wages, and in turn, higher producer costs. As an aside, when we calculate Population-weighted CPI inflation global consumer price ination using population size, rather World (excluding China) World (including China) than economic size, as weights, World (GDP weighted) the ination trend looks a little different (as the chart on the left shows). 4. Fiscal ination: this is when government budget decits are nanced by central-bank moneyprinting. Until the nancial crisis erupted, government-generated ination was tame. Since then, it has roared back to life as central banks have absorbed roughly a
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US real GDP growth and inflation
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third of all new government bonds issued since the end of 2007. This last route still has a very low prole, because bank lending to the private sector remains very weak in advanced economies. In effect, governments are generating replacement monetary growth and stopping the rate of global ination from falling even lower. But inationary danger looms if governments fail to shut down monetary nancing of their decits after private demand for credit revives. Once the central bank becomes the governments nancier, ination expectations become well and truly unanchored. That would be bad news indeed for government-bond prices.
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economic, social, demographic and political realities. Developed economies have huge debt burdens, for which there is no monetary resolution as yet. Equally elusive is a political resolution: how much longer can we run budget decits at 5% of national income to allay voter anger? How can we keep a lid on geopolitical tensions that have their roots in access to affordable food, drinking water and energy? In our indebtedness, how will we nance the replacement and refurbishment of decrepit infrastructure before systems fail and there are supply crises?
The battleground for the global ination debate is the global wage bill
Most poignantly, how will the conicting interests of the generations be resolved? Older people want ination to be held down to preserve the real value of their assets and pensions. Younger people want house prices to fall and to reduce personal debt burdens through rapid wage growth. In Britain, 76% of over-65s voted at the 2010 general election; 55% of those aged 25-34 and 44% of adults under 25. Imagine how the adoption of internetbased voting options might alter those proportions and how that might turn into a winning electoral platform in the future. The battleground for the global inationdeation debate is not gold, nor copper,
nor iron ore, nor even oil. The true battleground is the global wage bill. The wages of youthful emerging nations are already rising, heralding mass prosperity in Asia and Latin America. In the mature economies of North America, western Europe and Japan, a more complicated conversation is taking place between cash-rich corporations, embattled households and indebted governments. Fed chairman Ben Bernanke may have inadvertently killed off QE on 19 June. However, the successor policies may well include overt monetary nance: government spending funded by centralbank money creation, with an emphasis on lowering the unemployment rate of young adults. Japan leads the developed world in economic disappointment and policy desperation. If Japan can confound its critics and steer a course towards 2% ination, then the rest of the rich-world countries will not be far behind. The Japanese voters handed a politician, whose previous short tenure as prime minister ended in failure, a resounding mandate to reate the economy. If Shinzo Abe succeeds in casting off the shroud of deation in Japan, his will be a psychological and a political victory more than a technocratic one. The global stage is set for the return of ination. Is your portfolio positioned accordingly? Dr Peter Warburton is director of Economic Perspectives Ltd.
5 July 2013 MONEYWEEK
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