We’ve put together this nice little graphic which reflects our view the global economy is in a very unstable equilibrium and list many of the issues and headwinds it faces. Global economic growth, based on monetary or credit induced asset inflation, exchange rate manipulation, perpetual stimulus and negative real interest rates straddles a tight wire and very narrow path with inflation on one side and deflation on the other. By default, stagflation then becomes almost the steady state economic growth path.
We don’t pretend to capture all the issues or believe they are mutually exclusive as many are endogenous and depend on each other. Some can even be categorized either as deflationary or inflationary depending on the, or lack of, policy response. Furthermore, we are not even sure the concept of a global macroeconomic equilibrium exists in reality.
Nevertheless, the graphic is a great tool in framing the ongoing debate between the inflationistas and deflationistas. The markets, in our opinion, will lurch from one perception to the other until the ex post facts reinforce one of the two. Like Pascal, traders and investors have to hedge their bets.
In the Alchemy of Finance, George Soros wrote why economies and markets can be so volatile,
When events have thinking participants, the subject matter is no longer confined to facts but also includes the participants’ perceptions. The chain of causation does not lead from fact to fact but from fact to perception and from perception to fact. This would not lead to any insuperable difficulties if there were some kind of correspondence or equivalence between facts and perceptions. Unfortunately, that is impossible because the participants’ perceptions do not relate to the facts, but to a situation that is contingent on their own perceptions and therefore cannot be treated as fact.
Kind of concerning, given that central bankers are divided even on their perception of inflation. (click here if graphic is not observable)
Global Macro Monitor 
The global economy is not resting on firm ground. Everyone is just trying to maintain the status quo and drag on hoping that things will ‘change’. They are afraid of changes because this can affect their vested interests. Export-oriented economies try to remain the same. Those heavily-indebted economies hope to ‘create’ more debt to reflate their economies. It will take another major crisis or a 3rd World War to force the changes and the necessary reforms.
Don’t know about Euro breaking up = Inflation…..unless you bet at the races with Pascal I suppose.
The sad fact is that nobody knows what will happen. You can’t predict a complex system with linear models. You can guess, buy that’s all.
I see far more of the global inflationary issues happening at present. I guess the rise in food, energy and clothing costs aren’t sufficient to warrant concern about inflation.
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