Inflation And Broken Windows

My friend David Rosenberg agrees. He did a very interesting podcast with Grant Williams and Stephanie Pomboy. Quoting from the transcript:

David Rosenberg: So look, I would just say that you can almost dust off your slide package from 12 years ago. The same people calling for inflation now were calling for inflation back then. They’re the ones that have to answer as to why it is that inflation in the final analysis even with a stock market that quintupled, and even with a bull market and commodities, and even with 3-1/2% unemployment, we never did get the big inflation. So they’d have to come and explain why all of a sudden we’re going to get inflation in the coming cycle that we couldn’t get in the previous, not just one, not just two, but the previous three cycles.

Stephanie Pomboy: What worries me about it is that I totally agree with you on those forces of deflation or disinflationary forces that are clearly evidenced over that whole period …. But that doesn’t preclude people from getting all hot and bothered and getting chinned up on an inflation scare. They see the dollar going down, they see import prices going up and they assume, okay, well, that’s going to lead to CPI inflation, never mind that as you point out it didn’t for the last decade or even longer, but what is the possibility?

David Rosenberg: [At] the end of the day though, we have the most unpatriotic development you could ever think of, which is that Americans have paid down their credit card balances at a 14% annual rate over the past six months. It’s never happened before. And so it’s very difficult to get inflation when there’s no credit creation, which is what the money velocity numbers are telling you, or where there’s no significant wage growth. Where’s the wage growth going to come from? It’s very interesting that the same people that tell you about inflation are so bulled up on the economic outlook, they believe that full employment is still somewhere at or below 4%.

And of course the Fed’s forecast is that the next few years we’re going to get back to that magical level below 4%. But let’s just say that we have a situation where one in eight Americans is either unemployed or underemployed. There’s still tremendous idle capacity in the labor market. We have a capacity realization rate in industry that’s around 74%. We’re nowhere near the conditions, in terms of the capacity pressures in the economy, that’s going to lead to a sustained increase in inflation. It doesn’t mean that you don’t get some temporary periods of pass through in the goods-producing side from commodities in the weaker dollar, but that’s not lasting inflation.

So which will we get? I suspect both. First off, this summer we will have very low comparisons for inflation if you only look back for 12 months. If we get even a modest recovery in the COVID numbers, we clearly could see some short-term “inflation” in annual data from those weak comparisons. It won’t last. If you look back 24 months (which we never do) you would see inflation still under 2%. And for the record, annualized PCE inflation, the Fed’s favorite measure, is only 1.3% annually today. We have a long way to go to get to 3%.

The debt burden will cap growth enough to keep the inflation mild. It won’t be another 1970s period of sustained inflation. But it might be enough to send gold to record highs. A lot depends on how much inflation the Fed chooses to tolerate. Their recent signals indicate it may be a lot more than we’ve seen in this century. I don’t think they get worked up until inflation is well north of 3% for six months to a year. They have made it clear they want inflation to “average” 2% for a period of time. That means they have to overshoot that target to get that average.


To get inflation, we have to assume that we have controlled the gripping hand of the coronavirus. Look at what’s happening in Portugal, where B117 recently began taking off.

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