Dr. Doom: Nouriel Roubini warns: Monetary and fiscal policy that is too loose could lead to inflation or even stagflation | message
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• Several arguments suggest that inflation will continue to rise
• Loose monetary and fiscal policy could lead to inflation or stagflation
• A return of inflation would have serious economic and financial consequences
Inflation had stayed below most central banks’ annual 2 percent target for over a decade. According to a statement from the Department of Labor, the US consumer prices published in mid-April for March rose by 0.6 percent compared to the previous month and thus more strongly than expected. Compared to the same month last year, they were 2.6 percent higher. US consumer prices thus recorded the strongest monthly price increase since August 2012. Strategists at the US bank Goldman Sachs recently announced that they continue to expect higher inflation in the coming months.
Fed Vice Chairman Richard Clarida told Bloomberg TV, as reported by Reuters, that strong demand and possible supply bottlenecks in the next few months would ensure that the Fed’s inflation target of two percent will be exceeded, but he assumes that that this movement would decrease again later in the year. Earlier, central bank chief Jerome Powell had said in a discussion that he assumed that the expected economic boost would only temporarily fuel inflation.
However, as economics professor Nouriel Roubini, also known as “Dr. Doom,” writes in an article on Project Syndicate, several points pointed to a sustained secular rise in inflation.
Do Inflation Rise Last?
According to Roubini, one argument in favor of this is the excessive fiscal incentives in the US to stimulate an economy that seems to be recovering faster than expected. In the spring of 2020, the US passed a $ 3 trillion bailout package, a $ 900 billion stimulus package in December, and government spending of $ 1.9 trillion in March. A 2 billion infrastructure package is also to follow shortly. The USA responded to the Corona crisis with significantly stronger measures than to the global financial crisis of 2008.
As a counter-argument, according to Roubini, one could use that the measures to stimulate the economy will not trigger permanent inflation, as households will put a large part of the money aside to pay off debts. Furthermore, investments in infrastructure would increase not only demand but also supply by expanding the stock of productivity-enhancing public capital.
But even taking this dynamic into account, the increase in private savings should, according to the expert, lead to a release of pent-up demand, which should increase inflation.
As a second argument for rising inflation, which is related to the former, Roubini argues that the US Federal Reserve and other major central banks are agreeing with theirs Monetary policy too adjusted. The liquidity made available by the central banks has already led to an inflation in asset prices in the short term. As the economic recovery and recovery accelerate, it will drive inflationary growth in lending and real spending.
Have the central banks lost their independence?
According to Roubini, the central banks are currently willing to finance government budget deficits. According to the expert, at a time when public and private debt continues to grow, only a combination of low short-term and long-term interest rates can keep the debt burden at a sustainable level. Currently, according to Roubini, a normalization of monetary policy would cause the bond and credit markets and then the equity markets to crash and trigger a recession. According to the economist, the central banks have thus lost their independence. As Dow Jones reported, economists at Commerzbank also pointed out in December that the central banks, because they were not sufficiently independent, were likely to be too hesitant to raise interest rates, which would suggest a longer inflation period. The US Federal Reserve had announced that it would not raise its key interest rate until there was full employment and the rate of inflation would stay above two percent for some time.
However, according to Roubini, the central banks will probably do everything they can to maintain their credibility and independence if the economy then reaches full capacity and full employment again. Unanchoring inflation expectations, on the other hand, would destroy the reputation of the central banks and enable escalating price growth.
One could argue, however, that financing the budget deficits does not lead to inflation, but only to one deflation prevent. However, this presupposes that the shock that is currently affecting the global economy is similar to that of 2008, according to Roubini.
Is there a threat of stagflation?
According to the expert, however, the problem is that we are currently recovering from a negative macroeconomic supply shock, which is why an excessively loose monetary and fiscal policy could lead to inflation or even stagflation, i.e. high inflation with simultaneous recession. Roubini takes as an example the stagflation of the 1970s, after two negative oil supply shocks as a result of the Yom Kippur war and the Iranian revolution.
The economics professor therefore advises keeping an eye on a number of potential negative supply shocks, such as trade policy hurdles, supply bottlenecks and the worsening of the US-China trade dispute. These should be seen as a threat to potential growth as well as possible factors driving up production costs.
According to Roubini, the demographic structure in industrialized and emerging countries is also worrying. Commerzbank also mentioned demographic change beforehand as an aspect that will contribute to the rise in inflation. Economists are convinced that “the money supply, which has been rising too sharply for some time [ ] then lead to higher inflation if the great demographic change leads to a noticeable shortage of labor. “
Rising income and wealth inequality could also face a backlash in the form of fiscal and regulatory strategies to support workers and unions, explains Roubini in his article. This would put further pressure on labor costs. Meanwhile, according to Roubini, the concentration of oligopolistic power in the corporate sector could also turn out to increase inflation, as it strengthens manufacturers’ pricing power. “And of course the backlash against big tech and capital-intensive, labor-saving technologies could limit innovation in a more general sense,” said the economist.
Although there is an opposite narrative to this stagflation thesis, and in the short term the slack on the goods, labor and commodity markets as well as on some real estate markets will prevent a sustained surge in inflation, Roubini is of the opinion that the loose monetary and fiscal policy, due to a Series of persistent negative supply shocks, will begin to trigger persistent inflationary and eventually stagflationary pressures over the next few years.
Nouriel Roubini is certain of one thing: “The return of inflation would have serious economic and financial consequences.” Through them, according to the expert, we would enter a new phase of macroeconomic instability from the time of “great moderation” and the secular bull market in bonds would eventually end. Rising nominal and real bond yields would make today’s debt unsustainable and cause a crash in global stock markets. “At some point, we might even see the 1970s-style return of malaise,” said Roubini.
Finanzen.net editorial team
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