In the Financial Times, Robert Armstrong interviews Larry Summers and Nouriel Roubini about inflation. He writes:
Summers does not buy the notion that current inflation is the result of temporary bottlenecks. Whenever demand exceeds supply, the inflation that results is made up of a series of bottlenecks, each apparently temporary:
“If you thought demand was running hot relative to supply, you would expect there would be bottlenecks. You’d expect inflation to feed through selectively. And there is every reason to think we are going to see new bottlenecks. I read a story today that there is a bottleneck in Christmas decorations. Toilet paper is back to being a bottleneck. Thanksgiving turkeys. There will be new bottlenecks: the history of the ’60s and ’70s was that there was always a specific structural explanation for price increases.”
For evidence of sticky inflation today, he says, look no further than housing and wages, both of which are experiencing wild price increases that are not yet caught by the official indices:
“The housing market, which is 40 per cent of [the] core consumer price index, is saying that house prices are up 20 per cent, that rentals when you get a new tenant are up 17 per cent, and none of that has shown up yet in the CPI. The Dallas Fed has shown that just looking at house prices, not the CPI indices, has a ton of predictive power with a year lag.
“The largest component of costs is wages, and we have a record high level of quits, a record high level of job vacancies, and every employer in America is complaining how labour short they are, from people looking for cleaners to people looking for analysts in investment banks. Because when you raise wages for new workers you have to raise them for everybody, you don’t do it quickly, but you will do it.”
Nouriel Roubini on the coming stagflationary debt crisis
Roubini thinks that ultra-high debt, ultra-low interest rates and a range of pressures on global supply mean that we are headed directly for another crisis, this one culminating in a combination of low growth and high inflation. Starting with debt:
“Look at the level of debt, both private and public, in the global economy. In 1999 it was 220 per cent of GDP. Today, it is 360 per cent and rising. In advanced countries, 420 per cent and rising. In China 330 per cent and rising. In emerging markets, 250 per cent and rising and most of that in foreign currency.”
The only conceivable way out from under all this debt is suppressing real rates, printing money and inflating the debt away. The other options, such as cutting government spending or taxing the rich, are just not viable:
“I don’t see a situation in which government spending as a share of GDP is going to fall. In fact it is going to rise. There is so much income and wealth inequality that whether it’s the US, Europe or anywhere around the world, you’re spending more on the social safety net, given all the damage that has been done [to low-income workers] by trade, migration, globalisation and technology . . .
“The willingness and ability to raise taxes significantly on the quality of the rich is constrained politically and of course if you raise them too much, there’ll be damage to economic growth. The path of least resistance is to wipe out the burden of debt with fixed interest rates, with gradually higher and unexpected inflation.”
But inflating away the debt is hard to do without sparking a crisis, because inflation increases not just nominal rates but real ones, too:
“To reduce those debt ratios, going from 2 per cent to 3 per cent inflation is not gonna be enough. You need to have significant, unexpected inflation that wipes out some of the real value of long-term fixed-rate debt. And by the way, a lot of the debt is shorter term and has to reprice, or the debt is in foreign currencies so for emerging markets the option of wiping it out with inflation is not there, and you have outright defaults.
“. . . Markets will eventually price in volatile inflation, so inflation risk premia become higher. Therefore real rates rise, and eventually debt service ratios are going to become unsustainable.”
Matters will be made worse, Roubini says, by the reversal of several factors that have kept inflation low in recent decades. We are heading for less globalisation, more balkanised supply chains, less migration, decoupling of the US and Chinese economies, a hotter climate, restrictions on the flow of data, an oil shock driven by environmental policy, ageing populations and more. All of this amounts to a rolling supply shock, which will reduce growth already constrained by the debt crisis, and push prices up.
Read more here.