Inflation, Not Deflation, Mr. Bernanke

A weak economy doesn't mean deflation. Ultimately, inflation is a monetary phenomenon. When inflation spreads to the developed economies from the emerging ones, inflation expectations could become a factor. In the 1970s, despite high unemployment rates, labor demanded a wage increase to compensate for inflation. If the Fed keeps a loose monetary policy for the next decade, such a wage-price spiral is surely to occur.

There is a bright spot for developed economies from globalization. While their economic data tends to surprise on the downside, the corporate profits will surprise on the upside.  This observation is important to many who make a living by taking positions before data releases. Such market gyrations are not important overtime. What's important is its importance to the soundness of the pension system in developed economies. After globalization, aging is the next most important force. After losing labor income growth to globalization, a healthy corporate sector is the only path for meeting their pension liability.

The globalization reality is that developed economies like Europe, Japan, and the U.S. will suffer slow growth and high unemployment. Stimulus is the wrong medicine for solving problems. Believing this will lead to excessive stimulus, which causes inflation and bubbles in emerging economies first and inflation in developed economies later. The wrong policy prescription pushes the global economy through unnecessary gyrations, stagflation and possibly another major financial crisis in the emerging economies. It's high time for Mr. Bernanke to wake up from his stimulus obsession.

Andy Xie is a board member of Rosetta Stone Advisors Limited