Column: Inflation changes everything | Greenwich Sentinel

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“Inflation Changes Everything: Implications for the Economy and Financial Markets”

By Retired Men’s Association of Greenwich

At the Retired Men’s Association (RMA) meeting in Greenwich on Wednesday, June 8, Bob Phillips introduced today’s speaker, Larry Kantor, operating partner at Atlas Merchant Capital and former managing director and global head of research at Barclays. Prior to working at Barclays, Dr. Kantor held positions in academia, the Federal Reserve Board and other financial institutions. He received his Ph.D. and Masters in Economics from The Ohio State University. This was Dr. Kantor’s seventh appearance before the RMA. He comes every June to share his views on the US and global economy.

Dr. Kantor began his discussion by emphasizing that he would be looking at issues from a strictly economic perspective, as opposed to the political lens that is often employed today when discussing economic issues. He then anticipated his conclusion that our current inflation problem would be difficult to manage, only able to be alleviated by a recession of some degree. He noted that the underlying economic fundamentals were strong – for example, a historically low unemployment rate and strong demand for goods and services. Indeed, it is the strength of these fundamentals that suggests that it will be difficult to cope with inflation, as low unemployment tends to push up wages and increased demand will create pressure to the rise in prices even if the supply disruptions attributable to the war in Ukraine and Covid are resolved. Dr Kantor noted that the main source of the inflation problem was the Covid relief efforts which pumped a huge amount of money into the economy in a short period of time. He observed that this did not necessarily mean it was wrong to inject this amount of Covid relief, as meeting the short-term needs of individuals and businesses might have been worth paying the price of inflation. longer term. But this price is paid. Economics is called dismal science in part because of its warning that “there is no free lunch”, and that principle applies to Covid relief efforts as well.

The current Covid relief effort dwarfs the effort to support the economy after the last major financial crisis, the 2008 recession. The cash injection after the 2008 recession was around $700 billion compared to the roughly $5 trillion in Covid relief (about $3 trillion during the Trump administration and $2 trillion since Biden took office). To make matters worse, Covid funds were injected into the economy in a shorter time frame than recession relief funds. The scale and speed of Covid relief efforts have proven to be more than can be easily controlled by ordinary monetary and fiscal policy. On the monetary side, interest rates had already hovered around zero, leaving little room for the Fed to use its traditional inflation-fighting tool of cutting interest rates. He did, however, use quantitative easing (QE), which is basically buying bonds on the open market. But, because it did not anticipate the severity of the inflationary pressures, the Fed took a little time to implement QE, allowing inflation to gain momentum. Dr Kantor said it was the increase in demand resulting from the injection of cash, rather than problems with the supply chain, that accounted for most of the inflationary pressure. This is evident from the fact that after a sharp but brief drop in production in the early months of the pandemic, U.S. production and the amount of imported goods soared well beyond their pre-pandemic levels.

Even without additional Covid relief, several other factors suggest that the excess demand that is driving prices up will not come down easily. As noted earlier, business fundamentals remain strong. Thus, profits remain high and business spending will keep demand high. Household wealth, meanwhile, is at record highs, leaving consumers in a position to spend at a high rate. Moreover, it does not appear that debt is overburdened, which means that consumers and businesses are unlikely to have to cut spending for fear of not being able to repay their debt.

Several factors that have kept prices low over the past decades are reversing or at least easing. The fall of Communism created low-cost suppliers to the United States like China and Vietnam, and this source of cost reduction has largely run its course. Costs have fallen over the past few decades due to just-in-time inventory practices, but companies now seem inclined to hold higher inventories (thus increasing their cost of ownership) for fear of unexpected shortages resulting from pandemics, wars or political instability. Similarly, concerns about autocratic or unstable governments may reduce the extent to which U.S. manufacturers will cut costs by locating factories in low-cost countries. Finally, there was a move away from free trade, which had helped drive down costs.

Dr Kantor then reasoned that the solution to the inflation problem would likely require a slowdown in demand created by Covid relief efforts and that such a drop in demand normally meant the economy would fall into recession. While we hear talk of a “soft landing” when trying to fight inflation, this objective is more realistic when it is simply a question of curbing the acceleration of inflation, rather than to reduce the level of inflation, which is the objective now given that inflation has already reached a significant level. The market now seems to be anticipating that the fed funds rate (essentially, the rate banks charge each other for short-term loans), which hovered near zero at the start of the pandemic and has risen to around 0.75%, will rise. to about 2.5% later this year and 3.5% by the middle of next year due to inflation. Dr. Kantor thinks that higher interest rates and efforts to fight inflation will lead to a recession, but not necessarily a long one. Given the strength of underlying corporate fundamentals, stock prices could rise despite slowing economic growth, but a decline in stock prices is also plausible if interest rates rise sharply.

A lively Q&A on RMA followed Dr. Kantor’s discussion of everything-changing inflation. For those who want to see the full presentation, head over to the RMA website and click on the video at https://vimeo.com/user9053619/videos.

RMA’s next presentation will be given by Frank McGinnis, a retired McKinsey consultant and currently a fitness trainer at the Greenwich YMCA, and is titled, “Resistance Training and the Critical Role of Muscle in Aging”. This presentation will take place on June 23 at 11:00 a.m. at First Presbyterian Church in Greenwich as well as in webinar at: https://bit.ly/30lBj21.

RMA speaker presentations are presented as a community service at no cost to in-person or Zoom attendees. The RMA asks all eligible individuals to consider becoming a member of our great organization and thereby take advantage of all available fellowship, volunteer, and community service opportunities that the RMA offers its members. For more information, visit www.greenwichrma.org or contact Joe Mancinelli (mailto:[email protected]) or Peter Stern (mailto:[email protected]).

RMA speaker presentations are presented as a community service at no cost to in-person or Zoom attendees. The RMA asks all eligible individuals to consider becoming a member of our great organization and thereby take advantage of all available fellowship, volunteer, and community service opportunities that the RMA offers its members. For more information, visit www.greenwichrma.org or contact Joe Mancinelli (mailto:[email protected]) or Peter Stern (mailto:[email protected]).

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