Finance, Inflation and Demography
Is inflation inevitable in our economy in crisis? In any case, it is getting more insistent and reminds us of the conventional character of money. Inflation is moreover more than just a monetary phenomenon, it is an instrument at the service of the states, which permits to re-establish big financial flux imbalances.
Beyond the monetary phenomenon, we maybe ought to consider inflation as a return to real economy balance, for recent growth was fed by excessive public debt.
Moreover, we observe a situation that conjugates extremely low interest rates with public debts that are growing at a worrying pace. Obviously, this situation is temporary and saws the seeds of inflation. If at all the study of past economic phenomenon gives a ray of hope, even diffused, we will not combine public debt escalation with interest rate speleology without growing interest rate adjustment, and particularly without inflation.
What is more, too low interest rates overvalue asset value. Non-conventional monetary politics risk coming with inevitable inflation.
Kenneth Rogoff, former economist and head of the IMF, moreover continues to recommend two or three more years of inflation, sufficient to deflate all debts, all the more when political, and juridical systems and prudential supervision authorities are too paralysed. Nobel Prize winner Stiglitz says exactly the same, advocating the pursuit of monetary politics accommodation. An upsurge of inflation will thus be one of the potential solutions, without knowing what the triggering phenomenon and social correctives will be.
We feel inflation will thus be one of the foremost variables to be adjusted to the imbalances we are going through. For the rest, disconnecting monetary creation from wealth creation usually leads to inflationary upsurges. This inflation will have a major consequence: the banks, that form the interface between creditors and debtors, will have to identify their profitability, but the margins will be small. The inflation will also evoke generational readjustments.
But that is not all : on top of that, according to the Keynesian theory, inflation is a substitute for demographical absence, on the basis of which our redistributional models have been built.
Bruno Colmant and Gregoire Tondreau, Roland Berger
