Martin Wolf weighed in on the inflation debate in the FT yesterday. Having had his customary dig at modern monetary theory, on which it seems he wishes to pin all blame, he went on to opine that current US fiscal and monetary policy is dangerous and that, to summarise, we're headed for hell in a handcart if Biden continues with his current plans. As he concluded:
The question is whether societies want low inflation. It is reasonable to doubt this today. It is also reasonable to doubt whether the disinflationary forces of the past three decades are now at work so strongly. It is hard to believe these emergency monetary policies should continue for years, as many at the Fed think. I doubt whether they should continue even now.
In other words, he's saying three things.
First, he does not want the US to have an economic transformation to become the green economy it has to be.
Second, he does not want to break the cycle of low wages that has trapped the US in political decline.
Third, he wants to increase interest rates now, helping to push the US towards a banking crisis.
I think the first two comments are complete in themselves. Biden has to invest in the failing infrastructure of the US. And the failing incomes of middle-class America - created and driven down by an overpowerful finance system - are at the heart of the Trump nightmare.
So let me turn to the third issue. Do we need interest rises now? My answer is no. The reason is in the FT. In another article, it is noted that:
Even before the Covid-19 pandemic struck, Europe had thousands of companies that were the financial equivalent of the living dead, being kept alive by low-interest rates and plentiful amounts of cheap debt.
They added that ECB policies on low-interest rates had exacerbated this. Such policies have done so everywhere, just as in the UK there are many more such companies that are facing massive over-gearing, debts due and rents now payable. And, what is not written about are all the zombie households (if I can extend the rather nasty description used for business) which face exactly the same type of crisis, created by their own over-gearing and the risk of financial failure if borrowing costs rise. It's hard to know precisely how many of these households there are, of course. It is entirely reasonable to think that they run into millions in number. After a decade or more of ultra-low interest rates these are now hardwired into family budgets that are already stretched to limits and could not take the strain of increases.
So, what Martin Wolf is calling for is a cull of businesses. That is, of course, the usual capitalist demand to deliver stable money at the price of unemployment. And he is also calling for massive social stress as people's finances fail, their housing is put at risk and (by logical transmission) banks are put under pressure by mortgage defaults.
Of course, the failing companies would also harm the recovery because, despite Wolf's theory, the capital in them is not redeployed because that is not the way in which capital is now provided in our societies. Meanwhile, supply chain issues that are now the very obvious cause of any short term (and I stress that) inflation risk will be exacerbated as companies fail. Those zombies are usually doing useful things after all: it is only their accounts that are not in good health due to the under-supply of capital and the excess use of debt in economies hollowed out by the false economics of the at forty years. Put them out of action and there will be even less for people to spend on: the result will be more inflation.
So is there a risk from inflation? Yes, there will be inflation: that was always inevitable in the short term. We knew there was spending to be done. But the real risk is from the so-called anti-inflationary policies promoted by the likes of Wolf and Larry Summers. For the sake of short term stable money they will crush productive capacity, increase unemployment and precipitate a household debt crisis when none of these are required. That will most definitely create a crisis - initially of increased inflation as supply chains fail - and then it will turn into recession.
And remember too that the markets think that Covid is already all over, sharing the absurd belief of many from the Prime Minister onwards that vaccines have now seen it off for good. That is not true. Nor is Martin Woldf's economic judgement sound. We have to hope that the Fed, Bank of England and ECB continue to believe in fiscal support and low-interest rates. The alternative is an economic disaster.