Summary & Conclusions
Inflation and deflation may coexist in the global economy, but going forward may no longer offset each other as in the past. The hot or high-inflation economies (mainly, Anglo-Saxon consumer economies and some low-investment emerging economies like India) may tighten more than expected.
The cold or low inflation economies are China, Northeast Asia, and Europe that have excess savings, demographic challenges or excessive investment. Their interest rates could surprise on the downside.
As most industries that could move to China have already done so, globalization is no longer as deflationary as before. Overcapacity in China would thus not have the same deflationary impact on the global economy as before, in my view.
I believe that monetary authorities around the world may not truly appreciate the bifurcation of the world into hot and cold economies. The risk of policy mistakes on monetary policy, especially among hot emerging economies, seems to be rising. The excesses in some cases have reached proportions seen in prior emerging market crises.
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