The Great Inflation Delusion – Dr. Ed

Ref. Dr. Ed’s…

The Great Inflation Delusion

The central bankers have been fighting powerful forces of deflation. With all the liquidity they’ve provided, they have succeeded in averting outright deflation. However, the Fed, the ECB, and the BOJ haven’t succeeded in pushing inflation in their countries up to their 2.0% targets. Inflation remains awfully close to zero and too close to its border with deflation.

In my opinion, the central bankers are trying to fix problems that can’t be fixed with ultra-easy monetary policies. They are trying to fight the four forces of deflation: Détente, Disruption, Debt, and Demographics. I call them the deflationary “4Ds.” Let me explain:

He then goes on to do just that. I’ve excerpted bits, but you should check out the entire post. I think I am a hybrid between the lunatic fringe (my friends in the gold bug, market bear and debt-obsessed camps) and the conventional world (I did after all run a real business in that world for over 2 decades), but Ed Yardeni is a classic egghead (and I am writing that in terms of admiration) and financial academic. There is a place for that in my world view.


This microeconomic textbook model of perfect competition seems to be much more relevant in explaining deflation and disinflation during periods of globalization than any macro model. Globally, there have been fewer barriers to market entry because of the end of the Cold War. This is certainly true geographically. It is also true in other ways. For example, a potential barrier to entry in some industries is the availability of financing. Technology is especially dependent on venture capital. Low interest rates and booming stock markets around the world since the early 1990s provided plenty of cheap capital—too much, in some cases.

Disruption (near and dear to me, as in my business it was “automate or die”.

Competitive markets facing worker shortages will tend to stimulate productivity via technological innovation. Technology is inherently disruptive across a wide range of businesses. That’s all very deflationary. Clearly, there is a tremendous incentive to innovate and use technology to lower costs. Firms that do so gain a competitive advantage that allows them to have a higher profit margin for a while.


The central bankers simply ignored the implications of soaring debt. Their macroeconomic models didn’t give much, if any, weight to measures of debt. Perversely, their easy monetary policies reduced the burden of servicing previous debts, which could be refinanced at lower rates, allowing borrowers to borrow more. By declaring that they had moderated the business cycle, the central bankers encouraged debtors to be less cautious about the potential dangers of too much leverage.

Around the world, governments borrowed like there was no tomorrow. In the United States, buyers bought homes with no money down and “liars’ loans,” where credit was granted without a formal credit check. In the Eurozone, banks lent to borrowers in Portugal, Ireland, Italy, Greece, and Spain (the “PIIGS”) as though they had the same credit ratings as German borrowers. That turned out to be a very bad assumption. Emerging market economies likewise could borrow on favorable terms despite their often spotty credit histories.


Demographic profiles are turning increasingly geriatric around the world. People are living longer. They are having fewer children. As a result of widespread urbanization, children no longer provide the benefit of labor in rural economies. Instead, they are a significant cost in urban settings. Economies with aging demographic trends are likely to grow more slowly and have less inflation.

Again, the above are just a small sample of Yardeni’s entire post. Check it out if you’ve got some reading time available.

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