The finance and economics commentariat has been busy in the past few months educating each other about what inflation is, and what isn’t. To re-cap, just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising in themselves. More specifically, just because prices go up a lot in period 1, inflation can’t really be said to be accelerating unless the rate at which prices go up is higher in period 2, 3 and so on. To complete the circle; if prices were falling, we’d call it deflation, and the same argument on the rate of decline would apply, with an inverse sign. The amount of time spent by economists pointing out this trivial point is mostly an attempt to assure each other, and policymakers, that the spectacular CPI and PPI headlines we presently see on the screens are nothing to worry about. It follows that slowing the pace of asset purchases, not to mention raising interest rates, would be a grave and unforgivable error.
Read MoreEverybody knows the feeling that they’re getting more than they bargained for, and I suspect we’re about to see a crack in the market narrative along those lines. Let me explain. From the point of view of those who believe the benefits of economic stimulus far outweighs its potential costs, the Covid-19 epidemic is a convenient amplifier. A strong cross-party coalition has formed in response to the crisis emitting a rallying cry for governments and central banks to throw caution to the wind and unleash an unprecedented wave of support and stimulus. Policymakers have done exactly that. The number is still going up, but somewhere along the lines of 20-to-25% of global GDP is now on tap, and that excludes the fact that central banks are, in most cases, pledging unlimited support via various liquidity and purchase programs. What’s not to like? As I have been at pains to point out in response to this benevolent consensus on the idea that because money is freely available, no one should want for anything, reality is complicated. It’s relatively easy to create liquidity. It’s much more difficult to make sure the money goes to where it is “supposed to,” and in any case, there will always be disagreement about who should get what, and how much. The current situation is a case in point.
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