The strong macroeconomic data exhibits a clear message: the global economy is in a growth phase and is experiencing the first strong upswing since the subprime financial crisis 2008. The economic sentiment index of the European Commission reached its highest level for 17 years and the US economy, with its record-high Trumponomics effect on the stock market, is growing by almost 3,2 percent. The expansionary global zero-interest rate policy was designated to foster economic growth and minimize the danger of a big deflationary economic downturn. Despite its unprecedented interventionist approach, central banks worldwide are wondering about the last missing piece in the puzzle: where is the inflation?
Last week, the Economist published an article about the global phenomenon of missing inflation and elaborated on price imports, public´s expectations and capacity pressures. Although these three elements undoubtedly influence price movements, they fail to explain the fundamental, core reasons for this phenomenon.
Monetary policy, which is still based on 50-year-old economic theory and statistical tools such as Philipps curve and Fisher´s equation, fails to adapt to a completely disrupted economic framework. Our interconnected, globalised world with its increasing international flow of know-how and innovation experienced numerous dramatic structural and socioeconomic transformations over the last centuries.
The world´s shifting demographics increased the world´s median age from 21 in 1975 to 30 in not more than 40 years. Germany, with its unique demographic structure, is an adequate example of the ageing Western population and its post-war baby-boom generation. The disproportionately high number of old people are traditionally risk and consumption averse, a phenomenon that not even after the zero-interest rate intervention of the ECB changed. Despite a real average loss of 2312 Euros, German citizens stay reluctant to invest their money in alternative investments or spend it domestically for goods and services. Subsequently, the world has passed the tipping point, when net savings get positive resulting in less demand and lower prices.
Moreover, Globalisation and the numerous multilateral free-trade agreements reduced or cut tariffs, decreasing prices for consumers as a consequence. In addition, the increasing number and large segments of services, know-how and innovation increased competition decisively. The growing number of liberal, capitalist economies world-wide lead to more specialisation and economics of scale driving efficiency, productivity and subsequently prosperity.
Furthermore, it is evident, that the knowledge-driven global economy resulted in unprecedented revolutionary technological innovations. According to the New York Times, the resulting technology deflation especially since the invention of the IPhone, resulted in a decrease of Phone prices of 62% between 2004 and 2014. Taking into account that smartphones complemented or replaced cameras, video games, newspapers, business cards, laptops and numerous other things, it is reasonable to assume, that the world-wide overall demand for several afore-mentioned goods decreased, triggering another massive price-decrease.
Both economic concepts, Monetarism and Keynesianism have been disproved and fail to explain the ever-growing complexity of our global economy. If inflation and deflation are mainly driven by structural, socioeconomic and technological forces, it is absurd to fight them with the “whatever it takes” policy. The central banks create Asset-bubbles, Real-estate prices in stratospheric levels and a desperate exodus in high-yield bonds and cryptocurrencies. We should stop to do whatever it takes and do whatever is appropriate for our contemporary globalised economy instead. Believe me, it will be enough.