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.

Sound Pound for the weekend

The pound rallied strongly after yesterday's rate cut. This is the opposite of what normally happens, as lower rates mean that money is transferred out of a currency.

However the reason behind this is that the market assumed the bank of England would say more about quantitative easing - i.e. printing money. The Bank shied away from this, pushing the likelihood of this out by a few months.

The markets like this, printing money is a move of a very bankrupt country - see Zimbabwe, USA etc. Not the sort of thing the Pound should be associated with.

On the downside, we have deflation now, so if we were ever going to print money, now is the time. if we don't ever do it, well and good. If 'QE' happens in 6 months, when the worst of the deleveraging is over, then we will get 1970's style stagflation.

Don't be led by all the talking heads on TV and in the newspapers. Vince Cable on Newsnight was particularly bad last night, he is only feted because Osborne and Darling refuse to speak on Newsnight. QE is a bad idea but if taken is medicine for the worst of the fever, which is now. Not in a few months time....