It is my opinion that, starting in about two years, inflation will rise dramatically. As more countries count on deficit spending to stimulate their economies, and countries that previously bought large amounts of government bonds rein in their purchases, the only alternative will be the 'debauching of the currency' in many countries. Specifically, I believe this will happen in the U.S., U.K., and Japan, at a bare minimum.
I believe the stimulus is more important and that the potential depression it is designed to prevent would cause greater damage than dealing with inflation--if inflation is dealt with promptly and intelligently. But nonetheless, I think the coming period of inflation will be painful.
The mechanism is probably easiest to demonstrate with China. They export a lot to the U.S. We pay them with dollars. They buy U.S. government debt with many of those dollars. But Americans will buy less--and the Chinese economy will not replace American purchases with domestic demand. With fewer American dollars, the Chinese will buy less American government debt. Chinese exports have fallen 17.5% in the past year. Now, it's a bit more complicated. Their imports have fallen even faster, and their trade surplus has grown--they have a lot of dollars. But not to save. Their economy has stalled, and they are spending money on the same things President Obama's stimulus package is targeting. So they won't be spending spare cash on Treasuries.
Stimulus: % of annual GDP
USA: £800 bn 6%
Australia: A$ 42 bn 1.3%
Germany: €40-50 bn 1.3%
UK: £20 bn: 1.1%
France: €26 bn: 1.4%
China 682
Japan 577
UK 360
Carib banks 220
Oil exporters 198
5-year prediction: Inflation varies between 7% and 12% in most developed countries.
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