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Deutsche Bank Warns Of ‘Devastating’ Inflation ‘Time Bomb’
Inflation is "The defining macro story of this decade," Deutsche Bank declared, in a highly engaging note dated Monday.
Apparently, the bank intends to publish a new series of papers going forward in the interest of furthering what Chief Economist David Folkerts-Landau described as "intellectual diversity."
The new series is called "What’s in the tails?" and aims to "stimulate debate" by presenting "reasonable alternatives" to the bank's house views and central forecasts.
That sounds promis
“Even if they are transitory on paper, they may feed into expectations just as they did in the 1970s,” the bank said.
Back then labor unions were still strong and many more payment streams were subject to COLA adjustments. Those are now distant memories.
German-trained economists …..
Indeed. In addition, the demographic situation was the complete opposite of now.
While the German psyche is understandably Jaundiced against inflation these are thoughts that are reasonable to air. Thank you very much.
This article feels appropriate.
https://www.theatlantic.com/magazine/archive/2020/12/can-history-predict-future/616993/
I refuse to accept the proposition that it would be “politically impossible” for the Fed to raise the prime rate, in. 25 or .50 point increments, to 3.0, 3.5, 4.0, or even higher if “out of control” inflation warranted. The Volker recession of 1981 was sharp and painful — I know, I had just graduated from college — but it crushed inflation like a bug and the economy, with a little Keynesian stimulus, was booming by ’83.
“I refuse to accept the proposition that it would be “politically impossible” for the Fed to raise the prime rate, in. 25 or .50 point increments, to 3.0, 3.5, 4.0, or even higher if “out of control” inflation warranted.”
It’s definitely a narrative I see and hear widely. I also disagree that it’s “politically impossible”.
Inflation – blah, blah, blah. Bottom line for something we think is crucial to economic health; we don’t have a clue. Once we figure out what it is and how it comes about, then we’ll have a chance to manage it within specified limits. It’s interesting that there are few articles on what inflation is (or might be) and lots on which direction it’s headed. For now we are left playing ‘crack the whip’ with inflation expectations.
To stimulate discussion, I would suggest that inflation is a way (and not the most efficient) to measure societal fear. Economists look at market indicators, maybe they need to move upstream and keep track of fear issues and levels – fear of a virus pandemic, nuclear war, climate change, government collapse, not earning a living wage, identity theft, no health care, random gun violence and a whole lot more. Add a time factor to the fear tracker and you might have something. Perhaps, if I believe my fears won’t manifest for at least 18 months then my inflation expectations are low.
I think as usual the real question is political will for policy. Inflation is a long term problem if we do nothing to enhance supply to meet demand. We are effectively seeing the results of supply being curtailed for 12+ months then exposing it to latent demand built up over 12+ months in a supply chain with no built in surge capacity or buffer stock due to poorly adopted “just in time” practices. If we do nothing but control interest rates there will be huge consequences to now using the tail to try to unwag the dog. There were many problems with using low interest rates and bond buying in place of policy solutions to the GFC and then to Covid. I’m not sure just reversing those works after backing yourself into a corning without rather extreme pain. In what way do we suppose a strong sustained tightening wave will impact the countless zombie enterprises and then the economy and financial institutions as waves of implosion rock assets of nearly ever type all while consumer debt interest rates rise on stagnant incomes and rising inflation?
Unfortunately policy responses seem as far away as they ever were. Even in a dire case where we see Trump back in office with full control of the government… we really are not likely to see policy that addresses the needs of the economy to stabilize and recover.
“In what way do we suppose a strong sustained tightening wave will impact the countless zombie enterprises and then the economy and financial institutions as waves of implosion rock assets of nearly ever type all while consumer debt interest rates rise on stagnant incomes and rising inflation?”
A sustained tightening wave would drive a stake through the heart of many zombie companies, curtail (if not crush) consumer demand, and cause a lot of junk to be written off. Also: end of inflationary impulse. Creative destruction, anyone?
Oh definitely, how much destruction though? What consequences? Especially if there is not a policy response. Sometimes a forest fire takes decades to regrow when it burns too hot, they also can take even fire adapted animals out of the picture.