Many economists are puzzled by the fact that neither economic growth nor inflation have turned out as expected despite the great efforts by the central banks in the western countries to reduce their interest rates again and again, even to zero. The central banks in the EU and Japan, in particular, even reduced their interest rates to negative values.

People used to believe that central banks were coping with inflation. However, nowadays many central banks are looking forward to inflation. The modern financial system can hardly withstand a sharp fall in asset prices, because declining asset price means that many loans won’t bring added value back to the banking system. People say mild inflation is a good remedy for the banking system, while deflation will be fatal for the banking system. If inflation is believed to rob the public of their wealth, then the deflation will trigger banks’ debt crisis.

So why do the western countries fail to achieve inflation as expected by either printing much more money or reducing interest rate to negative values? When we investigate the ordinary working class in the western countries, we can find that both their salary and spending power haven’t improved or have even declined. It is no wonder that inflation has become a kind of wishful thinking, given the fact that the spending power of the vast majority of the population has shrunk.

After the economic crisis in 2008, the central banks around the world released liquidity by carrying out a monetary easing policy, which both stopped up the loopholes in the financial system and prevented the asset price bubble from bursting. In the short term, these financial measures will indeed help the financial system to avoid collapse and will maintain asset bubbles at a very high price. However, in the long run, instead of solving the underlying challenges, more and more problems will be accumulated.

In the era of too much liquidity, the world is definitely not short of money. However, the income and spending of people in many countries around the world are indeed decreasing. Liquidity is everywhere, but it hasn’t benefited the income of ordinary consumers.

In addition, low interest rates, combined with monetary easing policy, reduce the operating costs of enterprises, protecting many enterprises and thus continuing overproduction around the world. Excess production, together with insufficient spending power, makes it hard for inflation to occur. Therefore, the resulting deflation will be destructive.

Before globalization, when such an economic crisis occurred in a country, the enterprises which ultimately survived the crisis swallowed up the enterprises that failed to do so. As a result, the winners took all.

In the era of globalization, the central banks and financial institutions around the world have abundant liquidity. Whoever collapses first will be trampled upon at will by others. Today, the four major economies, the United States, Europe, China and Japan, all are trying their best not to collapse, because none of them want to be at the mercy of the others.

If the Federal Reserve really raises interest rates, this will leave other economies at a disadvantage, and an overvalued USD and higher interest rates will also impose more burdens on the US economy. It is also very difficult for the central banks of the EU and Japan to continue with their negative interest rate policy because such a policy has proved ineffective. No matter what policies the central banks implement, economic growth and inflation are merely wishful thinking as long as such policies fail to improve people’s income and purchasing power.

China is confronted with a series of challenges such as a real estate bubble and debt, and can hardly adopt tightening monetary policy. However, unlike the vast majority of developed countries in the world, Chinese residents still have strong purchasing power and huge private savings deposits. With such huge amount of private capital, China has the potential to achieve inflation. Both inflation and crazy speculation should be avoided. At the annual conference of CAIFU magazine in this March, it was pointed out that the most difficult period for commodities had passed and special attention should be paid to commodities.

The future world economy is doomed to turmoil and some members of the existing world economic system will not survive the crisis. China must protect, make good use of and provide guidance for these private funds, and avoid the damage of inflation and excessive speculation on these funds, because such funds will be the endogenous power to drive China's economic development in the future.

David Ren, Chairman of CAIFU Magazine