Here’s why inflation may be in the cards in a post-COVID-19 world
By Pietro Ventani on The Capital
Extreme monetary & fiscal policies combined with the disruption of global trade & technology consolidation may finally give inflation a fighting chance.
As the world continues to cope with COVID-19, economic data squarely points to deflation. Yet, with the pandemic accelerating, it looks to usher a secular pivot from deflation to inflation, or more likely, “stagflation” — the combination of high inflation in conjunction with unemployment and stagnant demand. The above table lists the change from “pre” to “post” in some key areas.
Let’s start with government policy. Governments were riddled with large stock of debt & is now surging to new levels because of COVID-19. Governments are bent to do “whatever it takes” to arrest the deflationary spiral and prevent a chain of global credit defaults which will result in larger deficits. Any fiscal concern is taking the backseat as “unconventional” tools, such as negative rates and Modern Monetary Theory (MMT), have become the new normal. This time, however, policymakers are desperate to force feed liquidity directly into the economy and the money velocity (M2V), a key precondition to any price increase, may finally pick up after declining for more than 2 decades. Furthermore, an additional cognitive tailwind for inflation is in place as policymakers, who have tried unsuccessfully to reflate for more than a decade, will see prices increase benignly for a long time.
Moreover, the persistence of low inflation in advanced economies for virtually three decades has been the byproduct of powerful secular trends, namely globalization and technological disruption. Some of these trends are now starting to revert.
Take globalization, global trade was already on a downward trend as populism drove the shift from global cooperation to confrontation. The pandemic, again, has accelerated existing trends. The call for “national” self-reliance and the disruption of travel is driving the balkanization of supply chains and less efficient production models. China, one of the great deflationary drivers of the last three decades, is facing increasing challenges in its relationship with trade partners and it is likely to accelerate the already planned shift from export-driven to domestic consumption-driven economy.
The pandemic is proving to also be a net advantage for the big tech giants. Companies like Amazon, Google, or Microsoft not only benefit from the increased need for digitization by society, they also face less competition as their smaller, less capitalized competitors face bankruptcy or become acquisition targets. Furthermore as tech giants become systemically important during this period, consolidation is likely to go unchecked as policymakers deprioritise expensive antitrust procedures that were previously a concern pre-pandemic.
With all these forces at play, it may be the perfect storm of extreme monetary & fiscal policies combined with the disruption of global trade & technology consolidation that will finally give inflation a fighting chance.
The information on this document should not be interpreted as or deemed to be a recommendation to any investor or category of investors to purchase, sell, or hold any security, currency, or cryptocurrency. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. The views expressed in this article are solely those of the writer.
