Offbeat You don't have to be afraid of inflation

00:34  23 may  2020
00:34  23 may  2020 Source:   boerse-online.de

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There has been , however, inflationary pressure elsewhere, particularly in prices of risky assets like stocks and corporate bonds. But that's not the measure the broader Fed follows, and it remains a struggle to break out of the inflation abyss. " Had the Fed been using a 2 percent target based on the

Don ’ t be afraid . (NOT Don ’ t fear.) There is nothing to be afraid of . Afraid is one of the adjectives that cannot be used before a noun in the attributive position.

  Vor Inflation muss man keine Angst haben © Torsten Silz / DZ Bank Once again the fear of inflation is at stake. This time, as has been the case in recent years, the triggers are the large bailout programs of the central banks. Worldwide interest rates were lowered, liquidity pumped into the markets and assets bought. In the Corona crisis, these programs generally exceeded the trillion mark in the larger countries. There is no end in sight. The enormous use of central banks is not a new phenomenon. Even after the financial and debt crisis, central banks saved the global economy from major damage with programs of this kind. Back then there were periods of greater concern for a rapid rise in inflation, but there has actually been no inflation in the past 10 years. As a rule, the protagonists of the fear of inflation have a scenario in mind like in Germany in the 1920s. During this time, the German government (and not independent central banks) printed money to meet its obligations. The money supply has risen very sharply in Germany and has completely decoupled from economic performance. The result was a complete loss of confidence of the population in the currency and ultimately hyperinflation. In my view, such a scenario is hardly possible today. Although the growth in the money supply has recently accelerated somewhat, it is far from decoupling from the economic foundations. In addition, there is no capital flight from the euro area and the exchange rate is stable. Such a chain of effects as a trigger for sustained inflation acceleration can be ruled out. So we come to the real economic aspects. The current monetary policy programs of the central banks secure the liquidity supply of the real economy by the banks, but not the banks directly. As a result of the economic standstill, the demand for liquidity and with it the demand for credit has risen very sharply. The commercial banks, together with the development banks, are fulfilling their obligation and have increased lending significantly. As a result, the growth of the money supply has also accelerated somewhat. This could actually lay the foundation for higher inflation dynamics. Although credit demand has increased, the loans are only needed as a replacement for liquidity. There will be hardly any investments. Rather, corporate investment activity is likely to remain very subdued in the coming years. The corona crisis was initially a supply shock, but has now turned into a demand shock. Companies are suddenly faced with a much weaker demand, which should continue for some time because the economic and social restrictions cannot be fully relaxed. In addition, the pandemic could change living and consumption habits, which at least results in a change in demand, which may also result in lower demand. The massive aid commitments from central banks and governments have the declared goal that there should initially be only a small number of bankruptcies. This ensures that the capacities do not become smaller. As a result, global demand is falling, while supply is only marginally decreasing. The global capacities were already more than sufficient before the COVID-19 crisis. At least there has been no demand-driven inflation in recent years. The global economy should therefore struggle with overcapacity in the coming years. This limits the scope for price increases and the incentive to invest continues to decrease. The support measures of the central banks and governments are therefore more disinflationary, i.e. in the direction of low inflation, than that they ensure high inflation dynamics. Certainly, in a few years, when the global economy strikes a new balance between supply and demand, the current policy mix could have an inflation-boosting effect. By then, a large part of the current programs will have been dismantled. So there is no need to worry about inflation, but rather a permanent environment characterized by very low inflation. In other words, an environment that we have observed in the past 10 years. However, the dangers that arise from this are also not insignificant. The money that the central banks pump into the markets does not have an impact on the price of goods, but all the more so on the prices on the financial markets. As a result, the financial markets are increasingly decoupling from the real economy. This would allow the central banks to lay the foundation for a global economic crisis. That is when the skyrocketing asset prices have reached a level that is no longer sustainable. Let us remind you of the tulip crisis and the collapse of Wall Street and subsequently the global economic crisis in the 1930s. In addition, the current central banking system itself could be at risk. The central task of central banks is to ensure a moderate inflation environment. But if inflation is not an issue for another 10 years, the question may arise whether central banks with the full power are actually needed. This could be politically very opportune. However, it should be remembered that only the trust of the population and the central banks in the past few decades have brought low inflation and low volatility in the financial markets, which was an important and essential contribution to the increase in prosperity in the world. Stefan Bielmeier is chief economist at DZ-Bank.   Vor Inflation muss man keine Angst haben © Torsten Silz / DZ Bank

Against the economic crisis, Venezuela increases the price of gasoline .
© REUTERS / Ivan Alvarado A Venezuelan walks past a sculpture at the entrance to the national oil company PDVSA, in Caracas, May 17, 2019. (image d 'illustration) Venezuelan President Nicolas Maduro announced on Saturday May 30 an increase in the price of gasoline. So far, Venezuelans have only given a few worthless tickets to the country's pump attendant. Gas will now have a cost. These new prices will take effect this Sunday, May 31.

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