Deflation may be on the way - that's good for gilts

Stock markets are on the slide again. And despite central banks printing money with wild abandon, the fear of inflation could be replaced by a renewed fear of deflation. And that could be good for gilts.

The late Milton Friedman was an American economist and recipient of the Nobel Memorial Prize in Economic Sciences. He is famous for saying "Inflation is always and everywhere a monetary phenomenon." He said that inflation was caused by excess money supply and the velocity of money.

The question we ask is "Is it possible, if money velocity remains low, that inflation might not arise even if the government printed money?" To the best of our knowledge that's pretty well what happened in Japan from 1990 huge amounts of money creation but no velocity. Deflation happened because the Japanese banks hoarded the money.

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