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Hyperinflation isn’t as distant a nightmare as you might think

23 August 2017

Worried about weak inflation? Don’t be. The alternative is so much worse

I mentioned to a broker friend of mine recently that one of the big debates at our upcoming inflation-linker conference – in New York in September - would be how the Fed deals with consistently weak inflation. A pained expression spread across his face. “Weak inflation?” he said. “We’ve got a 20-25% chance of a ‘Weimer event’ thanks to QE, and they’re worrying about weak inflation?”

He was of course referring to the hyperinflation in Weimar Germany in the early 1920s and the very real risk – in his opinion - of it returning to the developed world. If he had been most other people, I would perhaps put this remark down to claret-induced over exuberance. But not this fellow. Quite apart from the fact he’d not had a drink when we spoke, he’s been working in financial markets since the 1960s. When he started, the gents - and they were all gents - in the stock exchange still wore bowler hats, sponge-bag trousers and got their information on a real floor in real time from a single ancient ticker machine. He’s seen it all.

And so I worry a bit when he starts talking about hyperinflation in the West. “I just cannot see how you can pour that much money into the system (around $15tn now) and not end up with soaring inflation at some point. Bonds are not a good place to be right now.” (His colourful views on multi-asset funds will have to wait for another day).

It wasn’t so much his negativity that struck me, but the fact that I could grab the next financial professional walking down Lombard Street and he or she might be just as concerned about the impact on the world of weak inflation, or worse, long-term deflation, than of hyperinflation. And so I ask the question: given the alternative, what exactly is wrong with weak inflation?

Collamore Crocker, senior inflation strategist at US-based asset manager New Century Advisors, is sceptical about the Fed’s obsession with boosting inflation. “The more recent question, though you’d never hear the Fed even whisper it, is whether inflation persistently falling just shy of their 2% target is necessarily a bad thing, provided it’s also relatively stable, which it clearly has been,” he told Euromoney in an interview ahead of the Real Return XI event in New York in September.

In all truth, outside of my pessimistic friend, very few people fear hyperinflation. After all, in the US at least, money velocity is at its lowest level for 60 years, productivity remains low, fiscal stimulus is practically non-existent and global forces continue to act to push down prices.

More worrying perhaps is that there appears to be absolutely no consensus whatsoever about what the future holds for the global economy. It’s different to the past, where – by speaking to everyone – a journalist could get a broad consensus of the general order of the financial universe, with the odd loony at either end of the scale. These days, finding answers is like being the blind man in the dark room looking for the black cat, that isn’t there.

Find out more about the prospects for inflation, and what to do about it, at our upcoming New York Real Return Conference here.

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