I remember scratching my head in the early noughties when reading our chief economist at the time (Stephen Roach) views around the ‘double-dip’ recessionary risk and in particular the possibilities for stagflation.
Not being an economist, i struggled to understand the conditions that would allow inflation to persist, while also seeing slower growth.
It seems the conditions maybe here now.
Following the GFC in 2008, central banks moved into a highly accommodative policy position, cutting rates to zero and buying bonds, which had the effect of injecting massive amounts of liquidity into the system and anchoring risk.
There are many consequences to this, capital gets trapped and becomes unproductive. We have ‘zombie’ companies who are ‘just’ able to cover their interest payments, but no chance of escaping the debt burden they find themselves in. No CEO or owner wants to throw a towel in, but sometimes that is more efficient. Release the capital — in all its forms, back into the economy, afresh.
Twinned with this, we’ve also seen a rise in technology and specifically platform businesses, which are by their nature deflationary.
For the last 13 years therefore we’ve lived in a semi-goldilocks world — one we have no reason to wish (and therefore hope) to end.
The challenge is we’ve seen — through Covid — a hyper acceleration of all of these conditions. Easy money (check), debt growth (check), unemployment (check).
Global debt has grown out of all reasonable control. Money printing (the Burrrrr) is in full flight. When viewed over a longer term, its clear that the purchasing power of the USD has collapsed during the last century.
Why now though? It doesnt ‘feel’ too bad does it?
Well, lets see. The wealth gap has grown out of all control, the acceleration and concentration of wealth has exploded. So those at the top, those with the most ‘influence’ have little reason to call time. After all the stock market, bond market, crypto market is flying —
It is at the other end that things are not working. And we chose to ignore it at our peril. Political extremes are a manifestation of this, in the west this is AfD in Germany, Brexit in the UK, 5 Star in Italy, Trump — it goes on.
As we now attempt to exit the world of stimulus, it maybe that the cracks become more obvious. Price increases are not temporary, they are permanent and persistent. Companies now straddled with an uncontrollable amount of debt will need to shed staff — leading to lower employment. As central banks react to inflation, they raise rates, further hurting the poorest, and moving consumption to saving, hurting retail.
The party may of course go on — but it maybe prudent to explore what happens if it doesnt.
