Thursday 14 October 2021

Stagflation - umm, how?

All the comment in the media around the world today is of the coming stagflationary scenario and a return to the 1970's. 

Even at a high level I just don't get it - this is another case of journalists and commentators latching onto something they don't understand and cant be bothered to apply in a few minutes thinking into. 

The key here is the stag piece - inflation is a given as we have a global energy crisis. Longer term this seems to be really quite well under-pinned by a lack of investment in real energy and an over-reliance on renewables fairy stories far ahead of the real supply curve needed. 

This will make Putin and MBS very happy for a long-time to come, even Venezuela might be able to pay some of it bonds and Iraq bribe its way out of civil war. 

Anyhow, the first part of stagflation is a slowing economy. This feels like a very unlikely outcome of a huge bounce back from a lockdown of the world economy due to the pandemic. The idea that there won't be growth does not chime with activity in the UK now, where people are busily spending their enforced savings wherever they can. Town centres are heaving, leisure and retail surging. 

The only thing that would kill this off is a massive stock market crash that hammered sentiment. This is a hard thing to engineer when interest rates are zero-bound and the Fed prints money liberally to feed the system. Admittedly, there will come a time in the next few months when interest rates will have to rise or QE can be cancelled (a longer post on this is overdue) to reduce the impact of inflation. However, real inflation caused by energy price hikes wont really be impacted by higher interest rates - it is not financial inflation after all, but input prices. Lower currency will be a negative too in this scenario. 

However some reckless governments will see this as the easy way out of 150% GDP borrowing, with a few years of high inflation stopping all that painful austerity which instead can be meted out democratically to everybody and blamed on markets and foreigners rather than Government policies. 

So, anyone saying we will see stagflation must really be saying they see a huge market crash coming as the precursor - yet few seem to mention this.


E-K said...

Food, water, shelter.

And one of those has gone up by a factor of 10 in recent years. This is enormous inflation if only we were allowed to count it.

I don't know about stagflation - perhaps if you're on a fixed or low income and percentage rises don't mean much - but the fact is that the UK's nose is now further from the global trough because of this pandemic. Niceties such as steak, crab and computer chips will go where the money is worth the most - even if it's produced here.

Don Cox said...

This article from Bloomberg is worth reading.


dearieme said...

" they see a huge market crash coming as the precursor": I see one coming. Unfortunately I've seen it coming for years and it hasn't shown up yet.

But when it does, when the stock market is down 80%, I'll dive in. If still alive.

andrew said...

Things are becoming increasingly unreal.
We had a 40% fall in the uk stockmarket last year, and it has recovered.
This may happen in '22 and by '24 we probably will have forgotten.
No one seems to be worried

Some things can be triggered by a few forced sellers not least when they are over-leveraged (i.e. have a big mortgage).
I can see a huge market fall in house prices in '22 that is needed for the general health of the uk, and much overdue, and predicted by me every year since 2007.

The combination of rises in the cost of food/heating/petrol and a small increase in int rates could well trigger that and that will have a real and immediate impact.

John in Cheshire said...

Mike Maloney of has this figured out.
I think he has called it Indeflation.

Anonymous said...

You say only a stock market crash could derail the economy - I'm sure Boris may well also find a way, now the government believe they can micro managing the economy, in the name of saving the NHS.

Anonymous said...

Don't forget what the loony lefties are doing in the US. If that tidal wave of money doesn't trigger inflation, what did Weimar teach us?


andrew said...

Weimar taught us something you may not expect.
The germans had to sell lots of dm to buy foreign currency to pay reparations.
Their economy was under stress. They managed it badly.
So they printed money.

The usd is still the global currency of choice and foreigners need to buy usd.
While this is the case it is arguable that us inflation is being artificially suppressed.

... until the usd is no longer the global reserve currency at which point _events_.

Also the looney left in the us are somewhat to the right of the looney right who are currently in power in the uk.

If the core of your post was to say something bad is going to happen, then yes, i agree, but not for your reasons.

Anonymous said...

Weimar is the wrong lesson for the Uk.
The oil crisis of the 1970s is a better one.

Rising prices, far in excess of usual patterns.
Rising wages from an increasingly militant workforce, to keep up with and possibly exceed inflation.
Rising home nation costs far too high to compete with emerging markets cheaper Labour and their lower standards and operating costs.
Turmoil from terrorism. From anarchists and an assortment of far left redial groups disrupting to gain power via chaos.
The spectre of the USSR (China) ever present.
Inability to control inflation as the necessary steps would see any government that tried thrown out of office at the first opportunity.

Anonymous said...

FWIW, the Weimar stock market delivered a real return during the hyperinflationary period of the early 1920s, even in USD terms.*

It's in the elite's interest to see inflation (although to mask it as much as possible), so I have obtained the longest mortgage fix I can, and kept cash holdings down to a 1-year emergency fund.

* Source: Adam Fergusson, When Money Dies (easily found as a pdf)

dearieme said...

"Online": I just love these sexy Irish girls' names.