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INFLATION (Inflationary process (Supply & demand (Keynesian) (Economy…
INFLATION
Inflationary process
Wage Pull
Supply & demand (Keynesian)
Economy demand > supply
Monetary supply
MV = PY
Phase 1: Prime mover
Phase 2: Collateralisation
Phase 3: Diffusion
Phase 4: Disinflation
Phase 5: Deflationary
On bond returns:
deflation = excelent returns
over 10%: negative real return
4-10%: zero real returns
0-4%: positive real return
Why can high inflation occur today?
Inflationary process is not well understood
Inflation is extremely useful for politicians
Low inflation may have been achieved accidentally, as a consequence of global over-capacity, and not as a result of government and central bank policies
Debtors love inflation (households, companies, government, financial institutions)
On equity returns:
over 20%: negative real return
10-20%: bad but often insignificant
deflation = excellent returns (1% decrease = 0.8% increase in real equity returns)
Perids
1970s: High inflation
Terminology
Disinflation: positive but falling inflation
Beneficiaries
Government (reduces real burden of debt, hidden tax)