• As much of the world flirts with deflation or “lowflation”, some pundits turn to Japan to claim “we can happily live with it”. Their rationale: since 2009, Japan has grown by 3% per year in terms of real GDP per capita – faster than the US. Also, despite stasis and stagnation, it remains one of the world’s richest, most “civilized” and organized country. All true, but this can only last for a while. At some stage, an adverse feedback loop makes it impossible for the governments to meet their obligations, particularly pensions and healthcare. The major shock is no more than a generation away.
  • Structural deflationary headwinds such as ageing, globalization and rising inequalities make it possible to undertake quantitative easing (QE) on a scale unimaginable just a few years ago, without triggering inflation. QE also alleviates the burden of sovereign indebtedness: when a central bank purchases a sovereign bond with no intention of reselling it to the market, it receives from the Treasury interest on its bond before returning to the Treasury the profit it made from that interest income. Hey presto!
  • QE performs another trick: it transforms monetary policy into a fiscal policy tool. By compressing interest rates and yields, it penalizes savers and pension funds – the equivalent of a tax on investors and a subsidy to borrowers. In consequence, the frontier between monetary authorities and publicly elected leaders is getting blurred. The ultimate lesson is this: in today’s world, it’s not the markets that call the shots – governments reign supreme!


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