The Inflation Lie? Why and When Inflation Will Come Back

Page 2: The Upcoming Monetarist Cycle in Developed Economies

Based on Friedman’s theory, what might the upcoming monetarist business cycle in the US and Europe look like?

We will need to bear in mind that:

“Even after doubling over the past decade, wages in Asia are still way lower,” said Malte Luebker, senior regional wage specialist for Asia at the ILO’s office in Bangkok.


It is clear for us that some aspects of the balance sheet recession that ended with the Fed’s QE3, will continue to put some downwards pressure on spending. Therefore the development should be quite slow.

Hence the monetarist cycle for developed nations may look as follows:

2009-2012: Huge increase in the monetary base. Only in 2009 and 2012/2013 banks responded with a rise in money supply (see first graph on the previous page).

2012 until 2018: Friedman’s initial effect sub-divided in two phases:

Phase a) Stock prices rise and gold falls – we are currently in this period that is combined with the overheating phase in emerging markets (phase 5 on page 1). The rise of stocks can continue until first signs of US inflation appear, thanks to slow growth and disinflation in many countries; this implies more years of rising stocks in developed and falling or stagnating ones in emerging markets. In 2013 the stock markets of developed nations have outpaced the ones of emerging markets by a 12% return.

The recovery should be particularly strong for banks, especially for Italian and Spanish ones. Due to their depreciating currencies despite strong internal demand, Japanese inflation might overtake the US CPI and Swiss inflation those of Italy and France.

Phase b) Later, US GDP and employment will follow. Due to a weak participation rate, the inflationary effects are still limited in 2013. Wages are not rising yet. The Fed’s Evans rule has implicitly defined a NAIRU of 6.5%. According to the hawk Plosser, it should be reached in December 2014; inflation expectations are still low.

Between 2015 and 2018: inflation “The decline ex post in real wages, affects anticipations”. Already in 2012 this wage increase phase started in Germany (details). In the US it could take more time to commence. QE3 should end in early 2014, when the hawks take over the FOMC. The big tasks of central banks will be to sterilize the high liquidity provided.

After some years of slow growth, Emerging Markets might strike back; oil and gold prices should rise again.
Emerging markets with high inflation and without sufficient access to funds, like Argentina or India, might be forced into financial stress.

Between 2019 and 2022: overheating, (the dates depend on how quickly the balance sheet recession ends) Friedman’s “The rise in real wages will reverse the decline in unemployment.”

Strikes could then affect Germany, the DAX could start a free-fall. German inflation will probably be the first to touch 4%, while the ECB will be still reluctant to hike rates, because Italian and French growth will still be limited.

Germany will threaten to leave the euro zone if the ECB does not hike rates significantly; then once again, Italian and Spanish bond yields should go through the roof.

Read on the next page about a potential solution: Money Supply Targeting

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
See more for 8d.) Monetary Policy

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