Central bank hiking cycles in the developed world are slowly but surely coming to an end, raising the question of whether they have pulled off a soft landing, defined as a fall in inflation back towards target of around 2% without a meaningful decline in output and rising unemployment. On the face of it, the answer to this question is a resounding no. Interest rates in Europe, the UK and the US are up anywhere from 300 to 450bp in less than a year, driving up bond yields , and pushing yield curve inversions to near record levels. Anyone using these data points to predict what comes next, using historical relationships, will conclude that the wheels are about to come off in developed economies and their financials markets alike. The difficulties in the US regional banking sector is, in this case, simply a canary in the coal mine, warning of bigger shocks to come. The investment implications of such a view are simple; short equities and long short-term government bonds.
Read MoreThe skirmishes in the macro wars are getting dirtier. More recently, the debate on inflation has pitted #TeamTransitory and its detractors—I’ve seen the other side described as #TeamPermanent and #TeamSustained—in a mud-slinging and, often emotionally charged, spat. I suspect that #TeamTransitory will win, eventually—whatever that means—though I also think this side of the debate has most to answer for in terms of the deteriorating debate. The rules seem to change as the consensus-beating inflation prints roll in. As I as explained here, it is unreasonable to term all versions of the world in which inflation is not making a new high on a monthly basis, as a transitory. More importantly, however, the checkmate-like rebuttal to anyone arguing that rates could and should go higher that they must be in favour of higher unemployment is particularly odd to me. The question we need to ask it seems is whether there are conditions under which policy tightening—both fiscal and monetary—to rein in demand are optimal or desirable, in an economic sense, even if it means, presumably, unemployment going up. The answer is; yes.
Read MoreThe more I think about the current debate about inflation, the more I am inclined towards the following remarkable conclusion. We currently do not have a good framework to explain inflation, neither cyclically nor structurally. Perhaps more appropriately, the old consensus among economists and policymakers on what inflation is, how it arises, and what to do about it has been severely challenged, if not shattered entirely. In a post-pandemic world of a clear, and almost textbook, inflationary mismatch between demand and supply, this has created the odd situation in which everyone is talking about inflation, and more recently inflation expectations, concluding that it either doesn’t matter or that we don’t understand how inflation works in the first place. Nowhere is this clearer than in the debate about whether presently high inflation is transitory or not. The thrust of this discussion has as much to do with the main interlocutors convincing each other that high inflation doesn’t matter, as it is about agreeing on what, in fact, transitory means.
Read MoreI am still not entirely sure whether Noah Smith, a U.S. Economist and prolific blogger, is a converted MMTer or not. But I do know that he is doing a great job in describing the discourse around this newfound holy grail of macroeconomic policymaking. In my attempt to label MMT as “Woke Economics”, I leaned on some of Noah’s earlier pieces on this, and now he is back with his invocation of the new Macro Wars. The stage, according to Noah, is the recent fiscal relief bill in the US, prompting even otherwise pro-stimulus economists to push back. Oliver Blanchard and Lawrence Summers both suggest that $1.9T might be too much of a good thing, while Krugman is sticking to his Keynesian ethos, arguing that Biden’s bill really is ‘disaster relief’, a position that Noah seems to agree with. Replying specifically to Noah’s recent post, he argues that Keynesianism won the theoretical battle a decade ago, leaving only “cranks, charlatans and WSJ Op-ed writers” on the other side. Tyler Cowen chimes in, pointing out that Biden’s post-election fiscal stimulus push has as much to do with populism as it has to do with careful application of Keynesian macroeconomics. As it turns out, this is a position I have a lot of sympathy for.
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