We must keep this phrase in mind: Deflationary gap, the gap between actual and theoretical output at full employment. It is a very handy concept with which to understand overarching macro.
When Powell tomorrow says that the Fed will do whatever it can to promote inflation, he means that he will try to close the deflationary gap created by the pandemic. His only weapon is more stimulus, i.e., more debt. He might well also propose zero bound interest rates.
When debt is high, and it’s never been higher on a global basis, all macroeconomists worth their salt know that there are decreasing marginal returns to GDP associated with stimulating economies through additional debt. Increased debt means very minimally increased GDP. This is why it about 8-9 years to close the deflationary gap caused by the recession of 2008: the stimulus was so substantial and the marginal return so slim. This time, the recession and thus the deflationary gap is worse, much, much worse. The efforts to close it will be and have even larger than in 2008 because the deflationary gap is much larger. Therefore, marginal returns on these debt-laden efforts will be smaller, i.e., less bang for the buck. They are ‘effective’ to some degree at first, but they quickly run out of steam. A sugar-high, so to speak.
In short, Keynesian economics on steroids are a disaster. And that is exactly what we have.
Forget about inflation, therefore. Prepare for deflation because the deflationary gap will be with us for years. He who has cash will be king, provided cash is worth having after currencies have been debased via debt. The only money worth anything will be real money, gold and silver.
I just hope we don't end up in a deflationary spiral, a disaster for all.
Book it. |
