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10 23 2015 | by Victor Xing | Economics

Why has disinflation prevailed despite money-printing?

The 2008 financial crisis was a global deleveraging and disinflation event.  It was further compounded by other global factors and the sharp decline in energy prices.

Conditions within the U.S.

Underwater mortgages, tighter credit standards, higher borrowing costs for corporations, as well as the collateral damage on employment fueled the vicious cycle of decelerating consumption and investment within the U.S..  Amid investors’ exodus into quality assets, many debt-fueled investments had to be unwound to lead to further deleveraging.  This was a catalyst for domestic disinflation.

The Federal Reserve’s quantitative easing programs increased bank reserves and lowered borrowing costs, but impacts of a cooling U.S. growth engine was also being felt across the globe.

Decline of household debt to GDP

Household deleveraging - a disinflation catalyst
Household deleveraging is disinflationary

ECB’s premature rate hike

In 2H 2011, the ECB hiked rates and signaled more rate hikes to come.  This quickly resulted in tighter financial conditions and damaged the nascent economic recovery.  Further more, several episodes of European debt crisis resulted in the financial fragmentation that damaged the monetary transmission mechanism within the Eurozone.  ECB’s QE program did not begin until March 2015 due to divergent views within the Governing Council.  As a result, dis-inflationary pressure from within the Eurozone offset some of the reflationary policies by foreign central banks.

China’s not-so-soft landing

China flooded its economy with massive stimulus following 2008, and distortions within the economy manifested in the forms of housing bubble and wasteful infrastructure projects.  In recent years, the Chinese government tried to achieve a soft landing by slowly starving its credit-hungry real estate market, and the knock-on effect on other parts of the economy soon ensued.  Moreover, President Xi Jinping’s anti-graft campaign further weighed on domestic spending.

Oil and commodity prices

The sharp decline in oil and commodity prices weighed on global inflation (partly due to slower growth in China, partly due to excess production from U.S. Shale revolution.

Next article10 22 2015 | by Victor Xing | Economics

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