Inflation will make a comeback

Deutsche Bank issues dire economic warning for America

US macro policy and, indeed, the very role of government in the economy, is undergoing its biggest shift in direction in 40 years

The Deutsche Bank report concludes with this dire warning, “We worry that inflation will make a comeback"

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BIZ PRESS GROUP

As the world economy awakens from the 15-month slumber caused by the pandemic, Deutsche Bank has launched a series of research articles to spark debate and discussion about pressing post-pandemic economic issues. On June 7, Deutsche Bank issued its first report of the new series, titled “Inflation: The defining macro story of this decade.”

According to the report, “US macro policy and, indeed, the very role of government in the economy, is undergoing its biggest shift in direction in 40 years. In turn we are concerned that it will bring about uncomfortable levels of inflation.”

That could be deemed an understatement considering that the U.S. economy is already experiencing “uncomfortable” inflation.

Consider: Based on the most recent inflation report from the U.S. Bureau of Labor Statistics, “In April, the Consumer Price Index for All Urban Consumers rose 0.8 percent on a seasonally adjusted basis; rising 4.2 percent over the last 12 months.”

An annual inflation rate of 4.2 percent is more than “uncomfortable.” But the looming threat of inflation seems to have fallen on deaf ears in Washington, D.C., over the past year, as Congress has supercharged spending to levels unseen since World War II.

As Deutsche Bank notes, “The current fiscal stimulus is more comparable with that seen around WWII. Then, US deficits remained between 15-30% for four years. While there are many significant differences between the pandemic and WWII we would note that annual inflation was 8.4%, 14.6% and 7.7% in 1946, 1947 and 1948 after the economy normalised and pent-up demand was released.”

If the U.S. economy descends into an inflation spiral like that experienced after World War II, we could be on the brink of excruciating economic pain.

However, the profligate spending by Congress is only part of the problem.

According to Deutsche Bank, “Monetary stimulus has been equally breath-taking. In numerical terms, the Fed’s balance sheet has almost doubled during the pandemic to nearly $8tn. That compares with the 2008 crisis when it only increased by a little more than $1t, and then increased another $2tn in the subsequent six years.”

As any economist will tell you, printing gobs of money over a short period (which is what the Federal Reserve has done during the pandemic) is a key inflation ingredient.

We have seen this happen many times over the past century. From Weimar Germany to present-day Venezuela, massive money printing never works and always spurs out-of-control inflation.

The Deutsche Bank report concludes with this dire warning, “We worry that inflation will make a comeback. Few still remember how our societies and economies were threatened by high inflation 50 years ago. The most basic laws of economics, the ones that have stood the test of time over a millennium, have not been suspended. An explosive growth in debt financed largely by central banks is likely to lead to higher inflation. … Rising prices will touch everyone.

The effects could be devastating, particularly for the most vulnerable in society. Sadly, when central banks do act at this stage, they will be forced into abrupt policy change which will only make it harder for policymakers to achieve the social goals that our societies need.”

As mentioned above, the German people are well aware that skyrocketing inflation in and of itself can spark more than just economic upheaval. Hyperinflation, like that experienced in post-World War I Germany, can also lead to social disorder and political chaos.

In fact, one of the reasons Adolf Hitler and the Nazi Party came to power in Weimar Germany was the public's resentment concerning the hyperinflation they suffered as a result of endless money printing by Germany’s central bank in the 1920s to pay off World War I reparations.

Of course, the rise of Hitler was not solely due to hyperinflation in Weimar Germany. But when out-of-control inflation takes hold, people (reasonably) panic.

Throughout history, we have seen inflation-spurred panic manifest in social, political and economic turmoil. The looming question is how Americans will deal with the strong possibility of a post-pandemic inflation environment the likes of which could be unprecedented in our nation’s history.

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