Deutsche Bank warned in a report recently that the global economy will see “destructive” inflation in the next few years, which will impact every corner of the planet.
The report stated that the world is undergoing the largest global directional economic transformation in 40 years, which may cause inflation to rise sharply in just a few years, and this will cause a devastating blow to the lives of ordinary people.
We refer to the phenomenon of rising prices of purchased goods and services as inflation, and hyperinflation has been regarded as a nightmare in the economic world for decades.
When the prices of daily necessities such as bread and gasoline rise, ordinary people will fall into panic. History has taught us that when it loses control, as in the years before the Nazis came to power in Germany, things can quickly lose control.
Former US President Ronald Reagan summed up this fear. He described inflation as ” as violent as a robber, as terrifying as an armed robber, and as deadly as a killer. “
Therefore, economies all over the world are struggling to suppress inflation.
Deutsche Bank said in this week’s report that the world’s financial institutions have now fundamentally changed their views.
They say that, as many of us did in the course of the pandemic, global powers have reflected on what they think is really important.
German political circles stated that major economies like the United States, and even more cautious countries like Germany, no longer worry about debt and inflation, but are more concerned about working to make our lives better by achieving “social goals”.
Economists in these big countries welcome the government’s initiative to improve the lives of their citizens, especially when we have experienced such difficult conditions during the pandemic.
David Folkerts-Landau, chief economist at Deutsche Bank, wrote: ” Such goals are both necessary and admirable. They include more social support for minorities and greater equality in income, wealth, education, and health care. , And broader economic opportunities and inclusiveness. In this era, they should be the front and center of any government policy. “
However, economists at the bank warned that there is a downside.
They said that in order to fund this comprehensive and inclusive recovery, central banks like the US Federal Reserve will tolerate higher inflation, and countries around the world will be willing to take on more debt.
The article also wrote, “The epidemic has accelerated this shift in thinking. Sovereign debt has risen to levels unimaginable ten years ago, and large industrial countries have exceeded the 100% red line of GDP. However, investors, governments or international institutions Little is known about the sustainability of huge debts.”
Similarly, with regard to inflation, they said that the vast majority of central bankers and economists believe that any price increase that deviates from the historically low levels of the past decade will be short-lived.
However, economists at Deutsche Bank believe this attitude is dangerous, and they are very worried about what will happen if inflation continues to rise in the next few years.
The report warned, “ We are worried that hyperinflation will make a comeback. Few people remember how our society and economy were threatened by high inflation 50 years ago. These most basic economic laws are those that have withstood a thousand years. The law of testing has not disappeared. The explosive growth of debt funded by the central bank may lead to the advent of eventual hyperinflation.”
“We worry that central bankers have ignored the painful lessons of high inflation in the past. Either they really believe that this time is different, or they believe in the new paradigm that low interest rates will always exist, or they are protecting their institutions. Trying to avoid getting involved in political battles.”
The report expects that inflation “will reappear”, but it needs to wait until 2023.
“It should be a good thing for the Fed to shift its priority to giving back to society, but it is a terrible idea to ignore inflation and make the global economy sit on a time bomb. Just when inflation is given priority. At the same time, fiscal and monetary policies are being adjusted in ways that the world has never seen before.”
The article also wrote that the consequences would be devastating to everyone on the planet, but ironically, the new economic policy aims to benefit the most vulnerable.
“Inflation will affect everyone. The impact can be devastating, especially for the most vulnerable people in society. Sadly, when the central bank takes action at this stage, they will be forced to change policies suddenly, This will only make it more difficult for decision makers to achieve the goal of caring for vulnerable groups.”
When central banks are finally forced to act on inflation, they will find themselves in a dilemma.
“They will fight the increasingly deep-rooted notion that high debt and high inflation are small costs for achieving progressive political, economic, and social goals. This will make society politically unacceptable for confrontation. Inflation increases the unemployment rate.
In the past three decades, low and stable inflation and historically low interest rates have been the glue that supports macroeconomic policies. If, as we expected, this situation begins to disintegrate in the next year or two, then policymakers will face the most challenging years since the Volcker/Reagan period in the 1980s. “
But Deutsche Bank’s “eschatology” has not been widely accepted. Most economists agree with the Fed’s view that many places in the world have always believed that the current inflationary pressures will eventually pass.
Jan Hatzius, chief economist at Goldman Sachs, mentioned in an interview with CNBC that there are “strong reasons” to support this position.
The U.S. economy has a knock-on effect on the rest of the world. He believes that when the enhanced unemployment benefits there end, the U.S. economy will rebound, allowing workers to return to their jobs in the next few months.
He said: “All this shows that Fed officials can stick to their plan and then gradually withdraw from the quantitative easing program.”