FXStreet reports that analysts at Natixis note that two hypotheses have emerged: the world is heading for deflation, or it is heading for hyperinflation. So far, it has been low inflation, but not deflation, as real interest rates have remained very low. Financial markets expect a continuation of this equilibrium with low inflation but not deflation, as deflation is being averted by the money creation and the structural inflationary factors despite the massive savings glut.
“The deflation hypothesis results from the observation of an (ex-ante) global savings glut (ex-post, savings are equal to investment at the global level) and therefore abnormally weak demand. The savings glut is evidenced by the rise in the global savings rate and in the private sector savings rate, the decline in nominal and real long-term interest rates and the decline in global inflation.”
“It is true that if the savings glut gets worse after the COVID-19 crisis, depressed demand could give rise to true deflation. True deflation is a situation where inflation becomes so low that the real interest rate becomes excessive. This is not yet the case.”
“Traditional monetary theory explains that a large increase in the money supply leads to a large increase in prices in the medium term. But for this link between the money supply and inflation to appear today, the excess savings accumulated during the covid crisis must be at least partially consumed. If they are not consumed and are invested in financial or real estate markets, then asset prices but not goods and services prices will rise.”
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