Why Morgan Stanley Sees ‘The Return Of Inflation’ After Coronavirus Crisis
Everyone (or almost everyone, anyway) understands that COVID-19 is deflationary on net in the near- and medium-term.
Yes, there are pockets of inflation directly attributable to disruptions brought about by the virus. Grocery prices in the US - which surged the most in 46 years last month - are perhaps the most poignant example.
But broadly speaking, we are witnessing the largest demand shock in a century, and the deflationary impact of that has shown up dramatically in, for instance, oil, whi
This does create an interesting political conundrum in that an inflation caused by systemic central bank effects will be politically attributed to deficit spending. Less deficit/fiscal spending being a cause of central bank activities/response.
40 years of tax cutting has proved to be ill advised.
Correct. Using our tax base for political reasons to redistribute wealth was always a bad idea. The US has had the highest support for taxes in general of any developed country. Buying votes in the cities during the Depression was humanitarian. Buying votes and campaign contributions with tax reductions and subsidies is just bad policy. We have gone too far and going back will not be possible in any administration. Not going back will be ultimately destructive as well.
Demography + much lower immigration will be huge headwinds, but I think they’re on to something. Of course, Paul Volcker taught us how to tame inflation. Just jack up interest rates to 4% or 5% percent. Problem solved. Who’s in?
Government is way too big.
Hard to believe you would argue that in the middle of the worst economic downturn since the Depression. 36 million people have lost their jobs in nine weeks and you’re saying government is too big. I can only shake my head.
Why would you be surprised?
Government being the problem has been the major Republican talking point over the past four decades.
Not that Republicans in power really care about deficits that they have no intention of shrinking since it would result in their losing power.
But it is a good enough talking point for the party’s sheep (i.e. true believers) while the powers that be game the system to further favor and entrench wealth.
Early 21st century American politics are darkly humorous. Powerful elites using grievance lemmings to vote against their self-interest to further enrich an entrench themselves.
The GOP has been and still is the minority party. But ever since Reagan “discovered” the supply side model and started buying support with tax cuts, all republicans (odd name because they aren’t really) have climbed on board. Kansas under Brownback has shown the limits of this stupidity and served as the proverbial “canary in the coal mine.” What we will lean from their lesson is problematic.
I did not say that now is the time to cut the size of the government. However, with more than 22 million people working for Federal, state and local government agencies ( not sure- but I do not think this includes military) many who are in minimally productive positions, it has gotten too large, IMHO.
How about the US privatize more functions, over time?
If the government seriously looked at privatization or took a serious look at productivity, we would realize how much waste, redundancy and inefficiency exists at all government levels. That process would, no doubt, result in employee reductions- which is why now is not the time.
However, how about the next time the US is at “full employment”?
Or is bigger government always better?
Seems to me that if some of the workers were shifted from government to private employers, it would be a net positive for the economy.
Sorry empty BUT advances in robotics and computerization have been displacing workers quickly and the productivity gains are not redistributed through forms of socialization. Capitalism corners itself in escalating income stratification if left as INDEPENDANT in name only.This became a zero sum game. Moving workers to private sector deflates wages further.
We are at a turning point of modernity. Health care should be thought of as a utility and infrastructure should be a publicly funded forward looking priority. Wealth of Nations not wealth of the greedy individual. They can only fit a certain amount of mega yachts in New Zealand. Many very wealthy admit this has become unsustainable. We could use a wise invisible hand right now.
Ok- so I guess if I tell you that I think over population is a huge problem- you would not agree with that, either.
A dwindling population would hasten the decline of the American Empire.
Most demographers have global population peaking at 11 billion or so by 2040 and falling to 9 billion by 2100. Most, if not all, developed countries already have fertility rates below replacement, and above-replacement rates in most developing countries are coming down fast. Most of the population gains over the next twenty years will be a result of lower mortality rates driven by better public health. Except in the United States, where opiod deaths, death by firearm, and unintentional deaths (doing stuff while under the influence) remain stubbornly high.
Please explain why people working for, say, FAANGs or Dow companies, are in “good” jobs while people working in government are in “bad” jobs.
The trouble is that privatizing won’t be allowed to cover the biggest, National security will prohibit privatizing the military, even though it’s already about half private and the gouge profits being made by the private contractors eat up much more than any possible savings. Many would like to privatize social security but who you going to appoint to manage the money? Everyone will have their hand out on that one. How about smart government instead of smaller for smaller sake. The reason its so large is those 535 elected decision makers we send to DC all want personal stuff for them, their donors, and powerful lobbyists. Multiply that 5035 times and you realized government can never really be small again. Regardless of talk to the contrary republicans are at least as greedy as democrats.
RIght now the Federal Reserve would get down on their collective hands and knees to have an inflation problem in 2022. Since they are pinned to the zero bound, they can raise rates 500 bps and be at the average rate over the last 30 years. I find it hard to believe coming into the 3rd quarter of 2020 that things can bounce that quickly. The damage to the economy has been far reaching and systemic. The economy will rebound, however, it may not be as quick or easy as some assume. Open table estimates 25% of restaurants will never reopen. Frankly that sounds optimistic to me. There is a gigantic deflationary genie let out- 10% unemployment at year end would not suggest wage pressure- and wages make up a huge proportion of prices. I have heard a lot of employers implementing outright wage cuts now….The output gap right now is enormous, and even at year end if all goes well it will still be very large. Inflation not likely under this scenario.
Everyone seems to be focused on the demand side of inflation. If you get 20 to 30% of businesses shuttering completely, inflation will come from the supply side. Fewer suppliers, less competition. If the suppliers shutter faster than demand, you can still lose some demand and have inflation.
Very good writing with a nice understated easter egg near the end. Keep up the good work.
The debate will heat up on whether it is different this time. The one observation is that inflation options market is not discounting inflation, whether that is wise or not will only be judged in time.
Mike Aston made the point that inflation is the rate of change. After the large demand shock is cleared, the rate of change of prices is a one way street.
Ashton
All governance systems ultimately fail as those who have power become corrupt which in turn creates a wildly unequal distribution of wealth that ultimately brings the whole system down. It’s not just the public sector that is inefficient. Large corporations are filled with problems that usually get worse with size. The more monopolistic, the longer they last. What is government but a monopoly, the cost of whose output is a tax on its citizens. As individuals we are caught between private and public monopolies over which we have little, if any, control.