By Ambrose Evans-Pritchard, Telegraph.Co.Uk | 27 May 2008
As readers know, we 'Austrians' [monetary theorists] are not yet convinced by claims that inflation is spiralling out of control— though it obviously is in Eastern Europe, the Gulf, and much of emerging Asia. I suspect that headline CPI inflation in North America and Europe will peak soon as the commodity spike short-circuits, and then fall hard as recession/slowdown bites deeper. It may even turn negative late next year if central banks misjudge the "feedback loop" of debt deflation. So let me post the counter-view by Joachim Fels, joint-head of research at Morgan Stanley and one of the best minds in the City. His latest report— "Stagflation, More Than Just A Scare"— hits the nail on the head. He sees "scary parallels with the 1970s".
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To those who think the slowdown will create enough "slack" to contain inflation— as it has in recent episodes— Dr Fels has a warning.
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My apologies to Dr Fels for a little condensation of his points here and there. He may well be right. He usually is. But, my schema is a little different. We could see a reply of the early 1920s, when the world system split in half as they faced the policy ructions following the 'Great War'.
Germany, France, Belgium, and Poland (I believe, I write from memory) all opted for varieties of hyperinflation, either because it was the lesser of evils or because the political pressures were overwhelming (Germany had little to gain from discipline: the hyperinflation was unanswerable proof that the Versailles reparations were unpayable) [[actually, they were repaid; in worthless Marks: normxxx]].
The US, the British Empire, Italy, and (I think) the Scandies, opted for various levels of deflation linked to pre-war Gold Standard parity. The contrast was extraordinary. Could this divergence occur in a modern global economy with (mostly) floating currencies? The emerging world inflates into the stratosphere; the Atlantic economies and Japan go into a deflationary slide?
I will make tentative bet that this can indeed occur. Tentative, mind you.
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Normxxx
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