Archive for December, 2021

Is The Global Economy Sleepwalking Into Stagflation?

December 7th, 2021 Comments off

The economist  Mohamed El-Erian poses the provocative question on his twitter feed; are advanced economies sleepwalking into stagflation? He adds that while this is not his baseline projection (at present), the risks are growing. He points out that not only the latest variant of Covid, Omicron, but also rising geopolitical tensions heighten the probability of stagflation.

Stagflation is perhaps the most destructive economic phenomenon. It combines the worst of all intersecting economic trends: high Inflation and low or negative economic growth. All the current economic indicators point towards the increased risk of stagflation, a condition last witnessed by advanced economies in the 1970s  after the oil shock, right through the early 1980s.

At present, the primary economic shocks are largely self-inflicted, and centered around policy responses to Covid.  Repeated bouts of economic shutdowns and restrictions, leading to supply chain  disruptions and labor dislocation, combined with historically unprecedented borrowing by sovereigns abetted by central banks running their debt monetization programs on steroids, have brought to global economy into a perilous place. Now, as though there are not yet sufficient red flags, global tensions are growing: U.S. versus China on Taiwan, U.S. versus Russia on Ukraine, not to mention the Iran nuclear crisis. A perfect storm is brewing, and beckoning for the onset of stagflation.

Meanwhile, the U.S. Federal Reserve may be having seconds thoughts on its stealth policy of high inflation as a means of wiping out the radical and unsustainable rise in public debt. For the first time, the Fed is abandoning its position that high inflation is “transitory.” It may be too late. Economic forces will almost certainly compel the Fed to move much more quickly on monetary tapering. The end result will likely be a severe fiscal drag on the American economy, accelerating the onset of stagflation.

Sheldon Filger-blogger for