“Stagflation is the new investment backdrop,” BofA’s Michael Hartnett declared, in the latest edition of the bank’s popular weekly “Flow Show” series.
This week’s installment was particularly foreboding, even as it broke no new ground.
Hartnett presented what he called the “Charts of Darkness,” which together comprise “a thematic ‘dirty dozen'” highlighting, among other things, “the macro dislocations [and] wealth inequality caused by the central bank liquidity supernova” and “the coming stagflation.”
Some of the language was overwrought, but not all of it. Central banks have, of course, contributed to egregious inequality, as detailed in these pages on innumerable occasions over the past half-decade, most recently on Wednesday in “Cost-Benefit Analysis In A Failing Economic System.”
“The central bank response to COVID-19 has accelerated inequality,” Hartnett wrote, noting that “between 1950 and the late-90s tech bubble, the ratio of US private sector financials assets [to] GDP oscillated between 2.5x and 3.5x.” Now, it’s more than 6x (figure on the left, below).
Hartnett branded QE since the financial crisis a “radical interventionist policy.”
In the same breath (almost), he noted the intractable quagmire of ZIRP in Japan and Europe (figure on the right, above). “The BoJ has operated a zero interest rate policy for over 20 years, the ECB for almost 10 years [and] neither have been able normalize monetary policy,” Hartnett said, calling the BOJ and the ECB “cement in the Fed’s shoes.”
The implication (which I agree with) is that normalization isn’t possible — or at least not on any pre-GFC definition of the term.
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Still, the Fed blame game is getting tiresome after a dozen years. By now, it’s just a shtick for many commentators, analysts, fund managers and bloggers — something to bemoan when there’s nothing else to talk about.
I won’t presume to ascribe an opinion to analysts who haven’t offered one explicitly, but what I’d say (obliquely) is that if you want to indict monetary policy for exacerbating the wealth divide, you can’t simultaneously indict fiscal policy aimed at ameliorating various social ills for being inflationary and reckless. I mean, you can, but if you do, you’re likely just being abrasive for the sake of it.
A key reason monetary policy has ended up where it is today is that it’s been forced to act without a sufficiently robust fiscal kicker. If you indict both simultaneously, you’re implicitly championing a kind of across-the-board laissez-faire approach to the economy that (naively) assumes “the market” (read: unrestrained capitalism) will produce the best outcomes if politicians just get out of the way and central bankers stick to a narrowly-circumscribed mandate.
We know that doesn’t work. Indeed, certain goods and services simply wouldn’t be produced or provided at all by “the market,” and left to its own devices, unrestrained capitalism can lead to ruinous outcomes. To the extent the argument (any argument, really) is predicated on supply-side economics, that argument is contradictory and void. I’m sorry, but there’s scant evidence (if there’s any at all) to suggest that programs built on supply-side theories are viable when it comes to creating broad-based prosperity. If they accomplish anything, it’s turbocharging inequality and concentrating ever more power in the hands of capital at the expense of labor.
It seems to me that too much of the commentary today is designed almost exclusively for entertainment purposes. It’s easy to describe the mechanism by which monetary accommodation has exacerbated inequality. It’s equally easy to posit all manner of doomsday inflation scenarios associated with the kind of monetary-fiscal “partnerships” that are part and parcel of the pandemic policy response. In short, it’s easy to point out the problems. Especially when you’re not a policymaker and you’re secure in a high-paying job.
What’s not so easy, though, is making policy and offering solutions. Even when your motives are a semblance of pure, you can still end up saddled with terrible outcomes. Just ask Joe Biden.
Yup. The Fed is here because for over a decade it has been stretching its tools farther and farther to hold the economy together, while the rest of the government has been variously confused, paralyzed, or self-destructive.
Commentators who whinge about the Fed should consider where they – and their portfolios – would be if in 2008 and 2020, the Fed had said it would lower rates but do nothing more. Often: unemployed – and much smaller.
When I look at Hartnett’s right chart, I don’t see “cement”. With Japan having failed to fail for 20+ years, I see a CB world stumbling forward into a future it knows it doesn’t quite understand yet, but doesn’t necessarily need to revert. At some point, finding yourself with new bearings, one simply stops trying to figure out how to “normalize” back to the past in favor of accepting your new environs and using them as context for solving the outstanding problems – like wealth inequality.
A social analogue to the ZIRP transition might be the end of Bretton Woods in 71 (It lasted one generation). Many feared that ending the gold standard would yield apocalyptic debasement and floating rate chaos. Sigh, just move forward. Here’s Ian Shapiro on the end of Bretton Woods: “Economists present models and theories of how the world works, but in reality, politicians often fumble from one partial solution to the next. They’re reactive. They try something and when it stops working or becomes too costly politically, they try something else. And so it goes.”
Gosh, America fumbling it’s way forward in the dark? Didn’t we patent that? A couple more Fed chairs down the road, we won’t even remember what used to constitute normalized monetary policy.
Uptowner- what a great comment. I’ve been mulling over it for hours. Spot on! Yep.
Perhaps a card analogy is appropriate = you have to play the cards you’ve been dealt, not the hand you wish you had.
Great comment on a great comment.