With central bankers desperate to boost inflation both in their country, and around the globe, yet failing to do so for years (especially as measured by the long end of the yield curve) leading to serious economists and pundits going so far as proposing the pinacle of monetary lunacy, such as helicopter money, one person may have stumbled upon the “magic formula” for how to create inflation in the new normal.
Here is One River Asset Management’s Eric Peters laying out his inflationary “revelation”:
“British spenders have entirely looked through post-Brexit uncertainty,” said Mark Carney. “Consumer jitters were notable by their absence,” continued the Bank of England governor. UK wages kept growing, confidence remained solid, business investment resilient. So the Bank of England forecast its biggest inflation overshoot since 1997; expecting 2018 price gains to peak at +2.8%.
Now, let’s assume that having misjudged every single economic consequence of Brexit, that the BOE miraculously gets this one inflation forecast right.
What’s it tell us?
A populist uprising, compromised free trade, immigration restrictions, a 15% currency devaluation, 0.50% interest rates combined with aggressive QE is today’s magic formula for modestly exceeding a 2% inflation target 2yrs hence.
That’s a lot of work with little to show. But of course, the muted inflationary impact of this concoction is a function of our place in time. Had this happened during the tumultuous 1970s, Bank of England propeller heads would surely have forecast a self-reinforcing inflationary surge.
And they would’ve been right. But we live in the 2010s, and inflationary expectations have succumbed to decades of independent central banking. Economic volatility is remarkably muted too. With it has come a long period of political stability.
Perhaps the former precipitates the latter, or vice versa, depending on our time and place. Because inflation, growth and politics don’t exist in isolation; they’re phenomena that require our participation. So here’s what we know: the 2016 US economy is growing an anemic +1.6% with inflation of +1.2% (Japan GDP +0.5%/CPI -0.2%, EU +1.7%/+0.3%, Italy +0.8%/-0.1%).
And we also know that a long period of political stability is drawing to a close.
But we can’t be sure that political volatility will increase inflation volatility. Nor can we be sure that it won’t. It all depends on time and place. And today’s time and place is something new.
So yes, inflation is possible, it just can’t coexist with political stability, which may explain why – according to some more conspiratorial elements – a “surprising” Trump victory on Tuesday may be assured: after all, what better way to unleash political instability than to inaugurate the candidate who promises a full break with the establishment as we know it. If in the process, it leads to a surge in much needed inflation, now that QE has tried and failed, it’s a price the establishment, reeling under the weight of record global debt, is willing to pay.
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