Conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis
Warning signs are there for global economy, and central banks will be left in impossible position
...debt ratios in advanced economies and most emerging markets were much lower in the 1970s...If anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed rates, thus reducing many advanced economies’ public-debt burdens.
Conversely, during the 2007-08 financial crisis, high debt ratios (private and public) caused a severe debt crisis – as housing bubbles burst – but the ensuing recession led to low inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to aggregate demand, whereas the risks today are on the supply side.
We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.
I don't know anything so I have only a "feeling", not argument, about this. It seems to facile to me. I accept his word that debt ratios are much higher now than in the '70's, I frankly don't remember and I lived through the '70's as, mostly, an adult. But notice that he doesn't say the debt ratio today is higher than in 2007-08. I remember that and would not have taken his word for it if he said the debt ratio was higher today. That was the worst debt crisis of my life. So, I don't like the feeling of him picking the worst condition from fifty years ago and the worst from thirteen-fourteen years ago and grafting them on to 2021.
For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralised loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.
Well, he throws everything and the kitchen sink in there which also makes me uneasy about his argument. Should the Fed, right now, tighten monetary policy by raising interest rates? I’m asking. He says “loose” monetary policy is a big problem right now. Okay, what do you propose, man? 2%? 3%? 5%? How about Volcker’s 15%. That would tighten assholes. Tell us what Fed interest rate would tighten things sufficient for you. Fiscal policy. Biden shouldn’t have done his stimulus bill? Say so! He should forget about the infrastructure bill? Say that! There are asset and credit bubbles and inflated housing prices, coming out of a year-long lockdown? What would "normal" housing prices be? What are non-bubbly asset values?
Irrational exuberance in the crypto currencies--Economists, including Paul Krugman, have been saying BTC is an effervescent mess that is going to facialize irrationally exuberant know-nothings for twelve years. I remember when the price went over $1,000 in 2017. That was it! Buyers were going to get splooged. The price right now is $33,400. Doomsayers have predicted twelve of the past zero sploogings.
But in the meantime, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic ageing in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the Balkanisation of global supply chains.More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the Covid-19 pandemic are pushing national governments toward deeper self-reliance. Add to this the impact on production of increasingly frequent cyber-attacks on critical infrastructure, and the social and political backlash against inequality, and the recipe for macroeconomic disruption is complete.
Okay, enough. I thought the kitchen sink was the last. He’s now throwing in the plumbing and lighting fixtures. The guy may be right! I certainly don't know. Krugman said he doesn't think he's wrong but he may be. This just reads all bad all the way down and all anythings make me suspicious. I could go up to the roof of my condo right now and jump off, or wait for it to collapse, but I'm going to sit tight.
