Brace for QE all over again, and let us get it right next time
If you thought that zero rates and quantitative easing were a bad dream that we can all forget, you may be in for a surprise.
It is again becoming clear that deflation remains the overarching structural threat to the world economy.
A few brave analysts are already starting to flag a return to emergency QE as soon as next year, convinced that the US Federal Reserve and the European Central Bank have over-tightened and set in motion a deepening credit crunch.
Fed minutes published on Wednesday night reveal that the Fed’s own staff think that contagion from the collapse of Silicon Valley Bank has all but guaranteed a recession starting later this year.
This will smother any lingering pockets of overheating and lead to an output gap in the US economy by early next year, accompanied by plummeting inflation.
The larger point is that traumatic events of the last three years have not led to lasting inflation after all, let alone a replay of the Great Inflation in the 1970s.
There has been no fundamental reset of the monetary process. The International Monetary Fund says that for all the noise we remain in the grip of ‘secular stagnation’.
The inflation spike caused by the pandemic and Putin’s war – or rather, caused by a miscalibrated burst of central bank money in response to those shocks – is essentially a one-off adjustment in the price level.
The same powerful forces that have bedevilled Europe and America since the Lehman crisis will reassert themselves, this time spreading to China and large parts of the developing world.
Let us call it the slow ‘Japanisation’ of the planet.
“Monetary institutions may have to resort to the same strategies they employed in the decade before the pandemic... Even the central banks in some emerging market economies may eventually need to adopt unconventional policy tools,” the IMF said.
The world is still getting older. Much of Asia is following Europe into a demographic death spiral. The growth rate of productivity has collapsed in the West and is collapsing in the East.
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