Europe Will Not Benefit From Inflation Spike

Inflationists are happy. Inflation expectations rise to five-year highs and some rub their hands with the idea that their grand plan to create inflation by decree is going to be a success.

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Inflation, the tax of the poor, applauded by no consumer anywhere ever.

The discourse of inflationists is simple and, therefore, farcical. If inflation increases, the debt “deflates”, entering into a process of deleveraging as liabilities of states, companies and families loses value each year. “If inflation rises to 4%, every year, we have 4% less debt,” I was told in a television program. I thought “great, and if it’s 50% in two years we have no debt”. A joke.

The problem of the Eurozone is very different and will not be “solved” by inflation.

The Eurozone’s debt repayment capacity has weakened due to accumulated deficits, deterioration in cash flows, and the creditworthiness of public and private agents.

The problem with the simplistic argument of consensus inflationism is that it does not happen. There must be a warning of the risk of “trusting” in an inflationary exit to the liquidity trap.

– With rising inflation, real interest rates and interest expenses rise, in countries that do not reduce debt in absolute terms because deficits are structural.

– Tax revenues do not grow with inflation because overcapacity remains, most of the inflation increase comes from higher energy and input prices, and this creates weakness of margins. Anyone who thinks that real wages are going to grow at or above inflation when productivity growth s close to zero and with the stock of unemployment that still exists in the eurozone, including furloughed jobs, must be joking.

– Input costs increase more than sales, because of overcapacity, aging population, and higher imported oil, copper and zinc prices. Imports rise, and the ability to pass-through to final prices diminishes.

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