More wise macro words from William White: “Whether the future holds depression and deflation, or high and lasting inflation, or both in one order or another, remains to be determined.”

I’ve shared some of his work; here’s more from a recent AEI panel:

And here are his speaker notes, some excerpts below:

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during the “Great Moderation” the Fed and others attributed low and stable inflation to their own, wise policies of demand management. In reality, it reflected positive supply shocks (globalisation and demographics).

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While many are used to the word “stagflation’, implying that demand falls automatically when prices rise due to a supply shock (terms of trade losses in Advanced Market Economies in the 1970’s), it seems to me that many of these new shocks imply rising investment and demand going forward.

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If the Fed has to tighten much further, and then has to maintain that tightness, it seems to me to be very likely that something will come unstuck in the financial markets of AMEs. As well, the associated strength of the US dollar raises all sorts of problems for EMEs, especially those that have borrowed heavily in US dollars.

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All by way of saying, there are many reasons to believe consumption will have to be reduced to help avoid enduring inflation and that both monetary and fiscal policy have a role to play. Evidently, none of this will be politically popular.

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