Return With Us Now to Those Thrilling Days of Yesteryear…

At Project Syndicate Nouriel Roubini warns that stagflation shouldn’t be discounted:

NEW YORK – I have been warning for several months that the current mix of persistently loose monetary, credit, and fiscal policies will excessively stimulate aggregate demand and lead to inflationary overheating. Compounding the problem, medium-term negative supply shocks will reduce potential growth and increase production costs. Combined, these demand and supply dynamics could lead to 1970s-style stagflation (rising inflation amid a recession) and eventually even to a severe debt crisis.

Until recently, I focused more on medium-term risks. But now one can make a case that “mild” stagflation is already underway. Inflation is rising in the United States and many advanced economies, and growth is slowing sharply, despite massive monetary, credit, and fiscal stimulus.

There is now a consensus that the growth slowdown in the US, China, Europe, and other major economies is the result of supply bottlenecks in labor and goods markets. The optimistic spin from Wall Street analysts and policymakers is that this mild stagflation will be temporary, lasting only as long as the supply bottlenecks do.

True to form Dr. Roubini is less optimistic:

But what if this optimistic view is incorrect, and the stagflationary pressure persists beyond this year? It is worth noting that various measures of inflation are not just well above target but also increasingly persistent. For example, in the US, core inflation, which strips out volatile food and energy prices, is likely still to be near 4% by year’s end. Macro policies, too, are likely to remain loose, judging by the Biden administration’s stimulus plans and the likelihood that weak eurozone economies will run large fiscal deficits even in 2022. And the European Central Bank and many other advanced-economy central banks remain fully committed to continuing unconventional policies for much longer.

He concludes by pointing to the likelihood of “persistent negative supply shocks”. I would add that the best evidence we have is that public debt overhang is a drag on economic growth. We already have a lot of public debt overhang and the likelihood is we will have more.

Update

Also at Project Syndicate Kenneth RogofF waxes nostalgic about the similarities between the present and the 1970s: the messy and unsuccessful conclusion of a disastrous war, a Republican president challenging institutional norms, slowing economic innovation, flagging growth in productivity, and big increases in government spending unmatched by tax increases. Ah, those were the days.