The debate is ongoing
August 23, 2010
— Two years after the peak of the crisis, the debate between deflationists and inflationists carries on.
— We expect the debate to play itself out differently from country to country and to evolve over time.
— It is important to note that as the first signs of real recovery materialize, changes in public perception can also be expected, shifting from deflationary to inflationary expectations.
— We have analyzed the impact of inflation and deflation on different asset classes and present our conclusions here.
In the aftermath of the financial crisis, the fate of paper money – legal tender not backed by a physical commodity like gold – has come under intense scrutiny. Opinion seems to have settled into two polarized camps, but the reality is likely to be much less clear-cut. In fact, we expect the debate to play itself out differently from country to country and to evolve over time.
The first camp points to the major credit crunch induced by stressed financial intermediaries, and the increased slack in the economy due to rising unemployment and unused capacity. In this view, these conditions could lead to deflationary pressure and a self-reinforcing debt-deflation cycle. The counterview stresses surging government debt and overheated money printing presses. In 2009, for example, central bank money supply more than doubled in the US alone. From this perspective, the increase in both debt and liquidity would inevitably lead to a surge in inflation.
Two years after the peak of the crisis, the debate between deflationists and inflationists carries on, although we think that sentiment has shifted towards the deflationist camp for the time being...
[CSSBUTTON target="http://advisoranalyst.com/wp-content/uploads/2010/08/UBS_on_Deflation-Inflation_Aug_2010__2_1.pdf" color="23238E" textcolor="ffffff"]Download Complete UBS Report[/CSSBUTTON]
