Andrew Hunt
Deflation is a very real and mounting threat which must be aggressively combated before it completely derails a global recovery, according to a respected London-based economist.
Speaking at van Eyk’s Annual Conference in Sydney, Andrew Hunt, owner of Andrew Hunt Economics, warned delegates that rapidly falling inflation in the United States, Japan and throughout Europe was a serious problem, and demonstrated the failure of quantitative easing policies to stimulate growth.
“If the world wants to avoid a deflationary event and raise both global liquidity growth and global economic growth, it needs monetised fiscal expansion similar to that witnessed in 2010 and 2011,” Hunt said.
“Currently this approach appears to be out of fashion and so the threat of deflation will remain high in the first half of 2014.”
Hunt said QE employed by the United States Federal Reserve and other Western central banks had unintentionally created the wrong form of money. It had flooded the economy with “base money” which circulated within the banking system rather than putting more “broad money” in the hands of everyday people.
As a result QE had not increased the wealth of the average household or lifted consumer price inflation.
“In the real world, which economists don’t always live in, people and companies use broad money to settle transactions, pay their bills and save. They do not, and cannot, use base money but unfortunately QE policies have effectively only created several trillions of dollars of base money,” Hunt said.
“While the quantity of base money within Western financial systems has exploded over recent years, broad money growth has been minimal to negative.
A lot of the base money created by Western central banks has ended up within the financial systems of emerging markets.
While the emerging market bond market has quadrupled in size since the Global Financial Crisis to become one of the world’s largest asset classes, there have been detrimental side effects.
“The West’s decision to flood the emerging markets with credit via their own aggressive QE regimes and hyper-active financial systems set in motion a chain of events which has led to the creation of even more excess capacity in the World economy and a series of quasi-competitive devaluations by the world’s new producer economies,” Hunt said.
“Both of these effects are of course inherently deflationary for the global economy. This deflationary pulse emanating from the emerging worlds is all the more dangerous in the context of Japan’s adoption of competitive depreciation policy and the political upheaval within Europe.”
Andrew Hunt was a keynote speaker at van Eyk’s Annual Conference. He is director of London-based Andrew Hunt Economics and a consultant to van Eyk Research.
