Thursday, 17 May 2012

Low inflation expectations

Latest information from the Cleveland Federal Reserve on inflationary expectations indicates inflation is expected to be below 2% over the next 10 years. Really low inflation combined with even lower nominal interest rates spells negative real interest rates. In other words, fixed income investors are screwed.

Central banks around the world have an incentive to keep interest rates low in order to make it cheaper to service their debt. Massive printing of money to service debt should increase inflation in the long-run (due to the quantity theory of money) but apparently this is not happening. There is lots more room for fiscal stimulus. Go ahead central governments, spend, spend and spend some more.

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