NEWYORK (Project Syndicate) —There is a growing debate about whether inflation that arises over the next few months is temporary, reflecting a strong recovery from the COVID-19 recession, or persistent, that both factor pull and cost push.
Some argue that there is a continuing rise in secular inflation, which is still well below the 2% annual target of most central banks for more than a decade.
Arguments for inflation
The first is that the United States has enacted excessive fiscal stimulus for an economy that appears to be recovering faster than expected. The $ 1.9 trillion additional spend approved in March sat on the $ 3 trillion package last spring and the $ 900 billion stimulus in December, and 2 trillion dollars The infrastructure bill will follow soon.
As a result, the United States’ response to the crisis is greater than its response to the 2008 global financial crisis.
The reverse argument is that this stimulus will not cause persistent inflation, because households will save a large portion of it to pay off debt. Furthermore, investment in infrastructure will not only increase demand, but also increase supply, by expanding public capital to improve productivity. However, of course, even taking these dynamics into account, the increase in stimulus-induced private savings implies that there will be some inflation that frees up pent-up demand.
The second, relevant argument is that the Federal Reserve and other major central banks are overly interested in policies that combine monetary easing and credit. The liquidity provided by central banks has led to asset inflation in the short term, and will drive inflationary credit growth and real spending as the economy opens and recovery accelerates.
Some would argue that when the time comes, central banks can simply clear up excess liquidity by pulling out their balance sheets and raising policy rates from zero or negative. But this statement became increasingly difficult to swallow.
Make money off debt
Central banks have make money Large financial deficits are equivalent to “helicopter money” or the application of Modern Monetary Theory.
At a time when public and private debt were growing from an already high base (425% of gross domestic product in advanced and economies 356% globally), only a combination of low short-term and long-term interest rates can sustain the debt burden. Monetary policy normalization at this point would disrupt the bond and credit markets, and then the stock market.
inciting recession. Central banks have effectively lost their independence.
Here, the reverse argument is that when economies reach full capacity and full employment, central banks will do whatever is necessary to maintain their credibility and independence. The alternative would be to get rid of inflation expectations that would destroy their reputation and allow skyrocketing prices.
The third statement is that making money from the fiscal deficit will not cause inflation; rather, it would merely suppress deflation. However, this assumes that the shock that strikes the global economy is the same as the one in 2008, when the collapse of the asset bubble created a credit crisis and thus aggregate demand.
The problem today is that we are recovering from a negative total supply shock. Consequently, excessively loose monetary and fiscal policies can actually lead to inflation or, worse, stagnant inflation (high inflation coupled with recession). After all, the stagnant inflation in the 1970s came after two negative oil supply shocks after the 1973 Yom Kippur War and the 1979 Iran Revolution.
In the current context, we would need to worry about some potentially negative supply shocks that are both a threat to potential growth and which could drive production costs. . These include trade barriers such as de-globalization and increased protectionism; supply bottlenecks after a pandemic; The Sino-American cold war deepens; and followed by the spread of global supply chains, and attracting foreign direct investment from low-cost China to higher-cost locations.
Equally worrying is the demographic structure in both advanced and emerging economies. Only when senior groups are driving consumption by reducing savings, will new restrictions on migration put increased pressure on labor costs.
Furthermore, rising incomes and wealth inequality mean that the threat from populist backlash will remain. On the one hand, this could take the form of regulatory and financial policies to support workers and unions – a source of continued pressure on labor costs. On the other hand, the concentration of authoritarian power in the corporate sector may also demonstrate inflation, as it promotes the pricing power of manufacturers. And of course, the backlash to Big Technology and capital-intensive, labor-saving technologies could reduce innovation on a broader scale.
There is a contradiction to this stagnant inflation argument. Despite public backlash, technological innovations in artificial intelligence, machine learning and robotics could continue to undermine labor, and demographic effects could be offset by retirement age. higher (implies greater labor supply).
Likewise, the trend of globalization today can be reversed as regional integration deepens in many parts of the world and when service outsourcing provides alternatives to obstacles to mobility. (a programmer in India does not have to move to Silicon Valley to design a US application). Ultimately, any reduction in income inequality could simply counteract damp demand and secular stagnant deflation, rather than severe inflation.
In the short term, the stagnation of the commodity, labor and commodity markets, and in some real estate markets, will prevent a prolonged rise in inflation. But over the next few years, loosening monetary and fiscal policies will begin to exert persistent inflationary pressure – and eventually stagnant inflation – due to the emergence of any negative supply shock. long time.
Make no mistake: the return of inflation will have serious economic and financial consequences. We should have gone from “great censorship” to a new era of macro instability. The secular bull market in bonds will eventually come to an end, and the real and nominal yield increases will make today’s debt unsustainable, crumbling the global stock market. In the right time, we might even see the return of the 1970s style glitch.
Nouriel Roubini, professor of economics at New York University’s Stern School of Business, is the chair NourielToday.com broadcasting.
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