Because people are so interested in the swamp notes from last week Inflation debate, I think I will continue the topic that Ed started, and add some ideas that we didn’t cover the first time.

Most of the inflation debate today is about timing.No one can doubt Prices are rising, And few people will say that this will change in the next few months. The bigger question is how long inflation will last – and whether it will weaken before the 2022 midterm elections.

But what if we are in a completely different inflation cycle? inflation Will it move up and down in a “complex, noisy and volatile” pattern? This is the theory put forward by Michael Purves, CEO and founder of Tallbacken Capital Advisors, in a recent client report. He believes that the problem is not whether there is severe inflation, but the “complexity of inflation.”

The idea is that, as Ed and I discussed last week, when we get out of a pandemic, there are many different factors at work, and they don’t all point in the same direction. For example, technology will reduce the value of downtown office buildings.But low mortgage interest rates will undoubtedly continue to push up housing prices-on this, please read my Latest column On how two-thirds of global income is kept in real estate and land.

So you have two powerful forces fighting each other and creating a counter-trend, which will have completely different effects on different parts of the population. For example, Purves pointed out that robot installations have increased by 12% this year. It is good for companies trying to keep prices down, and bad for workers who have been laid off and have to deal with rising heat and fuel prices.

Covid has put a lot of effort into trying to predict any of them, because the inflation model of the past half century simply doesn’t work.Consider this Recent announcement Two economists from the Bank for International Settlements outlined the “bullwhip” effect of the pandemic, during which purchases were almost entirely shifted from services to goods. This creates bottlenecks in the supply of commodities, intermediate products and freight.

As stated in the report:

“[These] With strong demand brought about by the global economic recovery, supply disruptions related to the pandemic began to appear bottlenecks. But supply chain participants are trying to build a buffer in an already lean production network-the so-called bullwhip effect, exacerbating this situation.

The bottleneck in the upstream industry is particularly serious-that is, industries that supply inputs for many other products. These limiting factors have led to huge international spillover effects through global value chains.

The direct inflationary effect of the bottleneck May be restricted After relative price adjustments. However, If the bottleneck lasts long enough to trigger an upward shift in wage growth, there may be sustained inflationary pressures And inflation expectations. ”

(For more information, see this Twitter topic From the excellent BIS economist Hyun Song Shin).

These are many potentially unstable shifts in inflation and deflation trends.Consider now The politics of all thisThis will encourage a certain proportion of self-sufficiency and vertical integration, which will create more cracks in the neoliberal trade model.

Purves bet that this “complexity of inflation” will make central bankers make mistakes on the dovish side, rather than being forced to raise interest rates, which may require a quick retrospective. Of course, this may eventually lead to severe inflationary pressures (remember the Weimar Republic!).

As Purves said, “In a way, it’s as if the Federal Reserve suddenly became a [emerging markets] The central bank-facing supply chain chaos, re-localization, some commodity panics and labor anxiety”.

Ed, every time I feel like I’m in an emerging market country Brooklyn-Queens Highway Go to the airport. In your opinion, does the United States today resemble a developing country in other ways?

Recommended reading

• I am with Rose Dutta “We need a new university” Just like the newly established University of Austin, it focuses on “fearless pursuit of truth” without fear or favoritism.

• This is an interesting article that explains why factory towns in the Midwest might Control the composition of Congress In the future.

• I just watched a very beautiful and melancholic movie pass through On Netflix, about two black women in the 1920s, one was the wife of a doctor living in Harlem, and the other married a racist as a white. I highly recommend it.

• In the “Financial Times”, I like this very much Lunch with Chris Wallace, Although I am still much more optimistic about the Biden administration.

Edward Luce responds

Rana, I wrote this article in Abu Dhabi (where I attended a conference), where there is a good airport and perfect internet connection. To be honest, almost every time I travel abroad and most of the places I go, I think of the poor quality of American airports and airlines. If Biden’s infrastructure bill can upgrade public transportation in various forms, it will achieve one of its main purposes, although it may take a while before we start to feel improvements.

Let me return to the specter of inflation. I don’t have any special opinions, and Michael Purves’ observations are reasonable in my opinion. The cause of inflation has to do with demand relative to supply, not the efficiency of the supply chain itself. So I am not sure whether technology inherently causes deflation, as you argued in your reply to my last note. Either way, when the financial support for the last two years is withdrawn, we may face a very different problem a year later. As Standard & Poor’s recently warned, this may push the United States into recession in early 2023. If the upcoming fiscal austerity is combined with continued high oil prices, things may start to get very bad-even slight stagflation. Since I am in the Gulf region and Saudi Arabia keeps oil prices high (seems to be in alliance with Russia), this ominous prospect has surfaced in my mind. I think it’s fair to say that Mohammed bin Salman and Vladimir Putin do not want to see Biden re-elected.

Your feedback

Now are the words from our swamp man. ..

Respond to “It turns out that Larry Summers was right”:

“Ed Luce made an important call to avoid’circling the trucks’, but simplified things a bit. First, he made the March stimulus seem to be immediately and completely translated into demand. How much increased demand is there? Is it the wealthy savers who read how to spend money, they would have spent it, not those who actually use money to survive because they didn’t have a fault and still didn’t have a job? Summers’ view was more or less rejected , But it is taken seriously, and much more serious than those who regard him as a “hidden neoliberal” would have hoped (and much more serious than the dissenting voices of the right… anyway For Summers and the Taliban 2.0, it is wrong to blindly adhere to the views decades ago without reassessing it. It has brought political and public health disasters, but for the first time in decades we have seen mainstream politicians flirting.” Our social contract has long been broken and forgotten, and we need a lot of investment to catch up. I think more people are circling this idea instead of tribalism and fear of Trump.”-Joe Jackson, Rocky Mountain, New Jersey

“I really like your discussion of Larry Summers and whether he is a neoliberal, and agree with your overuse of the term-and the way neoliberalism is a modern term abused with its meaning. Nearly 180 degrees of change. In the 1930s, it was conceived as a policy framework that could limit abuse of competition, credit expansion, etc., and defend democracy in this way.” —Harold James, Princeton, New Jersey

Catch up with the previous swamp notes Fortis.