Financial markets are obsessing about inflation risk. In this video I assess that risk and suggest that those saying inflation is about to take off are wrong: there is no good reason why it should at present.
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Prescient again.
Tax After Coronavirus (TACs) : Tax, revenue, money and the role of tax in the economy
Posted on April 15 2020
. . .if there was insufficient inflation within an economy, and most economists think that some inflation is a good thing for an economy because it usually stimulates growth, then the government can run a deficit, meaning that it spends more in cash terms than it raises in taxation, and the resulting additional cash that is injected into the economy boosts available spending power within the economy, ensuring as a result that there is an increase in prices, which is what a government would want in this situation.
Another good video.
If I have a quibble (and I am not sure I do) it is that the very act of making the video validates the idea that inflationary fear is now central to the narrative.
It is not. 30 year USTs still yield below 2.5%, “break-even inflation rates” are still around target (yes, they are slightly above 2% but this is normal due to the asymmetric nature of inflation). Gold and other commodities are still substantially below the highs (copper, due to electrification of energy, is the exception).
In short – the markets are NOT worried about inflation – a better description would be they are less worried about deflation.
It is only the “small government” crowd that WANTS us to believe the markets are worried about inflation.
All accepted
Inflation is notoriously difficult to predict due to lags and human behaviour..for what its worth I think the he debt-financed / money printing promises from governments to protect jobs and the economy require negative real interest rates in order to “be seen to be affordable”. This will result in bond yields being nailed to the floor through QE and a relatively laissez-faire approach being taken to inflation running above target. In addition to the “perceived” necessity for government finances, this is also politically palatable as it acts as a transfer of wealth from savers (the elderly and well-off), to borrowers (the younger and indebted generations). The increase in the money supply may store up problems in the future and that is the fear of many. Human behaviour is difficult to assess so hard to gauge the velocity of money impact.
At a company level I can already see supply chains and balance sheets changing from an ‘optimised’ just-in-time model to a just-in-case model. This will result in closer control of supply chains, greater inventory and some rainy-day reserves being held on balance sheets. All things being equal this will reduce profitability and so prices will rise to match this — the costs of those places in a half empty aeroplane, restaurant or hotel are going to be more expensive not cheaper.
As ever it is impossible to predict magnitude but inflationary pressure is nearly upon us.
Prediction is difficult, no doubt…. but it is about risk and reward. I would rather risk the possibility of a bit of inflation at some point in the future for the reward of there being a decent future at all. Tightening policy now would do serious damage and destroy the future of millions – are you prepared to risk that outcome?
Your point about “just in case” rather than “just in time” for supply chain behaviour is well made but I think it is due to Brexit rather than anything else….. and will not lead to sustained continuous price rises but a one off effect that drops out of the data after a year.
Outside of Brexit, I don’t see where the pressure for higher prices comes from…. it is certainly not wages at the moment.
Having said that, asset price inflation IS an issue so I am not averse to modestly higher rates as a way to dampen asset price inflation as long as government keeps spending to put money in the pockets of ordinary people to spend on ordinary things. Personally, I would target a 2 -3% range on long dated government bonds with cash rates at 1% in order to take some of the froth out of markets.
“At a company level I can already see supply chains and balance sheets changing from an ‘optimised’ just-in-time model to a just-in-case model”.
Surely this was a perfectly predictable (inevitable) consequence of Brexit – save for the fantasists who thought the EU would just throw in the towel faced with the might of Britain – and offer us a deal that allowed us to have our cake and eat it? Therefore, my question is; whom does this seriously effect long term (and beyond Covid), save for Britain? Indeed is it not something of an incentive for other countries to set up supply chains that essentially avoid Britain altogether, and avoid Britain permanently?
Tsk, tsk: affect not effect.