High stakes

One of the big topics for the new year is inflation. Will global economies be able to contain it, after massive rate cuts, or will it come back for a second wave similar to the 80’s? To get some perspective, the chart below shows the average annual rate of inflation for 152 countries since 1971, the year Richard Nixon broke the gold standard and the world abandoned the Bretton Woods agreement to become 100% fiat. Most Central Banks have a “price stability” mandate, that for some reason is translated to 2% annual inflation. It’s interesting to see that none of the 152 economies has been able to achieve that goal, not even Switzerland, the epitome of economic prudence and stability, although they came pretty close. If we apply simple math, in order for the annual inflation rate to be at or below 2%, the world would need deflation (negative inflation), which will not happen simply because there is too much debt, and the cost would be unbearable. Since the U.S., Europe and China seem to be more inclined to print money than going through austerity, most developed economies will likely move to the left in the chart below, unless AI brings a deflationary trend that increases productivity without increasing inflation. The question is then, which one will come first, stimuli or AI, and if AI comes first, will it create big winners and big losers among countries, and will that bring conflict. The dynamic between those two forces will define the next quarter century, not only in economic terms, but socially and geopolitically. There is a lot at stake.

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