RE: Where to now ?.10 Jun 2021 01:16
Well here we go. We have the new order, and this time it will be different. Great stuff on the International Tax set up, but of course the City of London wants exemption (sorry, this part of course is no different to the last 30 plus years!!! they are such fine upstanding and deserving peope).
Given the lags between the Fed policy and outcomes, this guarantees overshooting (!). By the time the economy finally reaches the point when the Fed starts to tighten, it will be smoking hot (at “maximum employment”) and, inevitably, getting hotter, probably blowing out steam?
That is what happened in the 1970s. In that case, the necessary disinflation was postponed until Paul Volcker took over in 1979. The experience was brutal, lives were changed, many for the worst. As a senior Federal Reserve official from 1975 to 1987, in addition to battling inflation, he sought to limit the easing of financial regulation and warned that the rapid growth of the federal debt threatened the nation’s economic health. (Hmmm....familiar?) He prevailed by delivering shock therapy, driving the economy into a deep recession to persuade Americans to abandon their entrenched expectation that prices would keep rising rapidly. The cost was enormous. Consumers stopped buying homes and cars, millions of workers lost their jobs. Angry homebuilders mailed chunks of two-by-fours to the Fed’s marble headquarters in Washington. But Mr. Volcker managed to wring most inflation from the economy.
His victory inaugurated an era in which the leaders of both political parties (elected) largely deferred to the central (Fed, unelected) bank, allowing technocrats (and unelected bureacrats and idelogues) to chart the course of monetary policy with little political (those elected by democratic processes of a sort) interference...and the world has never been the same since
Given the inevitable lags between tightening and bringing inflation under control, the costs are again likely to be severe. That would not matter to the US alone. Remember: the Volcker shock triggered the Latin American debt crisis as well as a few others.
Yellen tells G7 to keep spending, says inflation will pass
This time, there is much more debt around almost everywhere. A severe monetary tightening would create even more devastation than then.
Getting the world as a whole out of the pandemic crisis is far from a done deal. Much more still needs to be done.
Furthermore, the new approach to monetary policy of the world’s most important central bank risks serious overshooting.
By responding only to outcomes, it is nigh on certain to react too slowly. It is possible this will not matter, because expectations remain well anchored, whatever happens.
I pray this will be case. The alternative does not bear much thinking about.
regards
the gnome
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