The inherent instability of Goldilocks’ market consensus

The author is the Dean of Queen’s College, Cambridge University and an advisor to Allianz and Gramercy

I don’t often take very strong views that run directly against market consensus. In the past, I rarely did this, and at first I felt an uncomfortable feeling.

The question is whether my current skepticism about the “Goldilocks-like” scenario in a not too hot and not too cold market will transform from an outlier to a benchmark for economists and policymakers. The advantage of this is that I don’t mind that I will make mistakes in the end, because it also means that the risk of unnecessary economic and financial disruption is much lower.

As the Bank of America recently emphasized Polls, The market is currently dominated by consensus based on three core assumptions: sustained rapid global growth; temporary inflation; and an ever-friendly central bank.

By accepting these three factors, investors push stocks and corporate bonds higher, anchor the government bond market, and let short sellers bet on falling prices to leave the market.

Despite some restrictions, I have no objection to the view that growth in the world’s largest economic regions—China, the European Union, and the United States—will be strong.

In fact, my view on Europe’s growth prospects is more optimistic than I have been in a long time. I also agree that the systemically important central bank will maintain an ultra-loose monetary policy for a long time. Regardless of whether it is necessary (in the case of the European Central Bank) or necessary (in the case of the US Federal Reserve), they have invested too much reputation and ideas in super stimulus measures to risk premature relaxation of the currency accelerator.

However, I am really worried that people generally think Current inflation rise It will be short-lived. This is not because I deny that the two effects on the current data will be reversed-a comparison with last year’s lower base and some temporary mismatches between supply and demand.

Rather, this is because of all the evidence on the ground for structural changes in the supply while aggregate demand will remain strong.

This is worth noting in the operation of the labor market, because the uncertainty of skill mismatch pushes up wages. The labor supply may also be affected by different work orientations after the pandemic.Furthermore Continuous change In the supply chain, inventory management and transportation.

Then there is the typical hysteresis. Since they have not experienced a period of inflation, some investors may appreciate too little of the two historical dynamics.

First, the seemingly one-time price increase can be cascaded through the system. Second, the increase in inflation may be continuous, starting with commodities and prices at the entrance of the factory, and ending with consumer prices and wages.

To be clear, I don’t expect to return to the inflation of the 1970s. However, we must respect the possibility of a shock to the financial system, which has been born for sustained lower and more stable inflation.

All of these will lead to another complication. If this concern is confirmed in the next few quarters-it will take time, because the central bank may extend the time period for defining “temporary”-this will trigger market consensus on the other two elements of high growth and high growth. Suspect the friendly central bank.

With the Federal Reserve Switch Its monetary policy approach relies on the results of economic data, rather than the traditional forecast-based approach. If its temporary inflation call is not realized, it may be too late to adjust its strategy.

Applying the brakes later, rather than releasing the accelerator earlier, will significantly increase the risk of unnecessary economic recession.

In fact, even the most cursory reading of the history of modern central bank policy errors is a strong warning message. It may also disrupt financial stability and further weaken growth. That is if the market accident did not happen before the policy error.

Central banks often repeatedly assert that inflation will be “temporary,” which puts aside the urgently needed exploration of price dynamics and labor market operations. The result is a comforting balance, the foundation of which has become increasingly unstable.

What follows is that the risk of future instability is increasing, and all of us are facing major economic and financial damage. Fortunately, this damage can still be avoided if the central bank and the market expand their horizons.

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