Trust you are safe! For a long time, I have been forecasting #DEFLATION. We got that! Today, I want to address, why I think we are about to see a NEW ECONOMIC REGIME arise soon - and why #STAGFLATION will be the transformation into the coming Kondratiev Spring #HZupdates
We know, that Fed and CBs around the world have been printing money - and lots of it! However, we have failed to see inflation - to the regret of Draghi, Yellen, etc. Despite their efforts, inflation has been in decline. Why? Because Velocity of Money has been in strong decline.
Two factors to create inflation: 1) Amount of money 2) Speed of circulation. The latter has been in decline for years as during Kondratiev's Winter, debt has become a burden to society - which hinders growth. The more debt - the less growth - and hence slower money circulation
The geniuses of Fed, brought up by Keynesian theory, believed, that they could bring higher growth back - every time it slowed - through Monetary stimulus. Ever since 1998, any headwind, has been meet by stimulus by Fed. To begin with - they were kings! Cheap Money created growth
However, the real burden has been DEBT - and the Monetary stimulus have had one clear consequence. More money was borrowed - to finance short term consumption - and so the Debt levels increased. By 2008, debt levels had become a huge problem - and we had a major recession
Again, Fed and CBs around the world scrambled and beat Deflation by 2009. But they found it increasingly difficult to keep growth up despite QE1, QE2, QE3, Twist etc. In their ignorance - all they did was to ENHANCE the problem as the Monetary policies only INCREASED DEBT levels
By 2020, the system was so fragile and valuations were set at perfection! QE-insanity had created the largest bubble ever! Any small pin could burst the bubble.....! And along came #COVID19 - a massive shock to the real economy - at a time where Debt levels were ~50% above 2008!
For a long time, Fed has been able to conduct their misunderstood policies - as inflation has been subdued. But this is about to change! Below, is the Velocity of M2 which has kept inflation in check. Clear Ending Diagonal - with one last spike lower - before MAJOR reversal.
This picture is exactly what we see mirrored in #Oil which is major component of inflation. Oil has been developing in Ending Diagonal - which made me call for crash <20 USD (10 USD) and #Deflation. But!! It is an SECULAR ENDING pattern i.e. we are at the end of the LT-trend!!
Same picture for #CRB. Ending Diagonal - and though we still have a leg down - we soon at a Long term end. The days of free QE lunches from the Fed are over! Soon, the economic regime will change and any Monetary stimulus in the future will cause higher inflation #HZupdates
As always, a crisis brings about change! This time #COVID2019 has been the trigger. Centralbanks and Governments are scrambling to counter the effect of the virus -but pay little notice to crisis their response is about to unleash. In fact, they are already FIGHTING THE WRONG WAR
The crisis is perceived as a DEMAND crisis. The size of demand stimulus packages and monetary stimuli + the extremity of the BUBBLE are about to push the economy into a worse situation. The burst of the bubble pushes economy into recession - while stimuli sets us up for next wave
This is the theoretical perspective: Aggregate Demand shifts in due to virus/burst of bubble. As businesses close down and supply chains are disrupted, Agg. Supply shifts in. Massive stimulus from CBs and Goverments pushes AD out strongly (5% of Global GDP so far):
Net effect: Higher Price Levels - at a Lower Output level. This is the very definition of #Stagflation #HZupdates
So my take on the situation is: CBs and Government are currently fighting the economic fallouts of virus which is great exacerbated by the greatest bubble ever created by failed Monetary Policy. They believe it will be a free lunch and might even over-do it as Deflation soars +
However, the stimulus will push the economy into the INFLATIONARY regime before getting out of the economic slowdown as bubble deflates. This will make Monetary stimulus counterproductive (void) - and only Fiscal stimulus can be used - in a world soaked in Debt. Furthermore, +
some countries will not be able to provide the necessary Fiscal stimulus due to high debt levels, which will greatly exacerbate the crisis in these countries - like Italy, Spain, Greece in EU. The consequence will be a high unemployment and hence societal unrest. +
Radical politicians may be voted into power, and structural shifts may occur ex. further break-up of EU or harsh political/military confrontations. #COVID19 is what we fight now but real threat is what comes next due to the extreme bubble created by Centralbanks failed policies
That is all for today! Deflation to continue in last leg before new economic regime takes over. First part will be #Stagflation which is currently NOT anticipated by CBs or governments which are focused on Fighting the wrong War. Stagflation will create worst fallouts! #HZupdates
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