Inflation now appears to be the more preferred option among central banks, with the Germans ECB being the notable exception. Of course, the German central bankers are not entirely alone in their reservations about turning on the printing press. Countless economists have predicted a dire future with the return of Weimar Republic-type inflation; the world has so far seen none of these predictions materialize, and anybody who is now still talking about inflation is treated with derision. Paradoxically though, now the Brits and the Americans have started to mull over the prospect of tapering. It is nonetheless worth noting that it is Germany's resistance against debasing its currency that has plunged the country into a deeper recession than most others during the Great Depression.
Why are we not getting the much-anticipated inflation? Well, first of all, while we might not have seen the prices of cabbages increasing, the prices of financial assets have certainly soared. On the one hand we seem to be in a better position than people living during the Weimar era, for not having to carry a huge bag of cash in order to buy a pair a trousers. On the other hand we wonder how this more invisible form of inflation will eventually transpire. Classical economic theory tells us that false price signals result in misallocation of resources and eventually somebody will have to pay - the savers are already paying, but who is next on the line?
My other observation is that debasing the currency is not in the game for everybody. For countries with hard-currency debt there is no worse nightmare than a currency devaluation; think the Asian Financial Crisis. In other words, throwing the towel is only available for the privileged few whose debt is so desired by everybody else that they can issue in their own currency; or, better still, their currency IS the so-called "hard currency".
Lesson of the day? Eat, drink and be merry; for tomorrow your ten pound note might be worth less than your overseas cousins' five dollar note; and chances are, you won't even notice!
