The Covid-19 crisis is one year old, and already, on the economic front at least, optimism is gaining ground.
The International Monetary Fund (IMF) economic growth projections, released last week, point to a strong rebound: the world economy is forecast to expand by 6% this year, led by emerging and developing Asia, which is expected to grow by 8.6%.
With news of another Covid-19 vaccine on its way and optimism rising ahead of the end-year holidays, it looks like 2021 will shape up to be much better than 2020.
But one forgotten danger could spoil the party: inflation. Price rises are far from investors’ minds, but an ‘inflation tantrum’ could have devastating effects on various countries’ economies if they are not kept in check.
UK chancellor Rishi Sunak seems to be trying to build for himself the image of a man who is not afraid to “tell it like it is” when the situation requires it. But his actions show that he is prepared to sacrifice long-term economic development for a short-term boost for his Conservative party.
If after the great financial crisis of 2007-2009 the word “extraordinary” characterised monetary policy, the Covid-19 pandemic calls for a much stronger adjective: “unprecedented”.
As the world has never before been faced with an instance when virtually all economic activity stopped for a certain period of time, this is an appropriate word. However, in monetary policy really very little can be said to be truly “unprecedented”.
For example, take modern monetary theory (MMT) — a theory about how to have your (monetary) cake and eat it, which (simplistically) states that if a country can print its own currency, that country will never default on its debt because it can create as much currency as it wants to and use it to pay back the debt.
Major central banks, to a certain degree, have already begun versions of MMT.
When the bank of central banks warns about financial stability, you have to take notice — even if the warning comes in the Bank for International Settlements usually dry, academic style.
The BIS recently published a paper about the effect of prolonged interest rates on financial stability, and it makes worrying reading. (However, as most people are on holidays in August, unless they are reading it on the beach it will largely go unnoticed).
Speeches and releases from various European Central Bank officials don’t make the best summer reading, that’s for sure. But it might be a good idea to go through a couple of recent ones, which give a hint of what the future might bring.
The snow has melted and it’s time to make plans for the future again. And like every spring, those plans are likely to include what has become known as “reflation” — inflation increasing again to a level where it can eat away at the mountain of debt the world’s big economies have to deal with.
Will consumer price inflation, rather than inflation in asset prices like property and securities, finally take off? There have been two interesting points of view last week on this issue.