After a decade in which economies have fought deflation?

After a decade in which economies have fought deflation?

 The Senate hearing confirming Janet Yellen as US Treasury Secretary took place this week, just ahead of President Biden’s inauguration. The focus, quite naturally, was on “reviving the pandemic- stricken economy”, said The New York Times. Yellen is preparing to go large on the stimulus front. In advance remarks, the former Federal Reserve chair observed that: “Right now, with interest rates at historic lows, the smartest thing we can do is act big.” That implies a more inflationary economy. No surprise, perhaps, that a “record 92%” of global fund managers surveyed by Bank of America “expect global inflation to rise” in 2021, said Stephen Little in Investment Week. Consumer demand is likely to increase once the vaccine roll-out “allows economies to get back on track” – fuelling an inflationary trajectory, even without a massive cash injection in the world’s biggest economy.

Inflation can be useful for governments accumulating monster deficits, because the real value of the debt falls. But the worry in some quarters, said The Economist, is that the incoming administration’s “enormous debt-funded stimulus plan” – worth $1.9trn, or “9% of pre-crisis GDP” – “might overheat the economy”. One prominent economist to warn of this is Harvard’s Larry Summers, whose criticisms are “notable” because he has hitherto been arguably “the world’s foremost advocate of deficit spending”. There are three reasons to suspect overheating might be on the cards. First, there is some evidence that the downturn may prove more temporary than some fear – more a “hiatus than a prolonged slump”. A second factor is the “arithmetic of stimulus”. Even before President Trump injected a further $935bn of deficit spending in December, the total fiscal stimulus in 2020 amounted to almost $3trn – about 14% of GDP and “much more than the probable fall in output”. A third reason to expect overheating is that the Fed is still “tripping over itself to signal that monetary policy will remain loose”. According to its chair, Jerome Powell, the time to raise interest rates is “no time soon”.

“It’s no wonder that a lot of people think we’re going to see an inflationary dénouement,” said John Stepek on MoneyWeek.com – if not this year, then soon after. The one thing that might alter the trajectory, on a global basis, is if the Chinese recovery stalls. If the pendulum does swing firmly towards higher inflation, the implications for investors are interesting, to say the least, said Scott Haslem in the Australian Financial Review. “Calling the turning point at which inflation risk is no longer tolerated by markets will likely be the biggest call for investors over the next few years.”


Comments