Kasriel: ‘greater risk for the global economy…is inflation’
So we can put a check by Paul Kasriel’s name for inflationistas because he has come out today with a report saying he believes it is inflation over the medium term which is the greatest risk to the economy.
I will not keep you in suspense. I believe that the greater risk for the global economy in general and the U.S. economy in particular is inflation, not deflation. I arrive at this conclusion both on secular and cyclical grounds.
For the record, I believe deflation is the greater risk right now. However, when the reflation play takes hold (and I believe it will do by Q4 or Q1 at the latest), inflation will be the real threat. So I agree with Kasriel. Think $100 oil or higher for starters. Commodities are going to be a good play all around. Kasriel identifies secular and cyclical reasons inflation is a problem over the medium-term. Secular reasons would include a higher Fed Funds rate, disappointing productivity growth, and higher defence spending. Cyclical concerns for the U.S. include the positive relationship between the output gap and inflation, and the exchange rate correlation to inflation. There are other factors too like the re-emergence of Japanese consumer demand and the rising levels of government debt.
The global markets are on to this trade as the dollar has sold off massively as have U.S. government bonds. I do think these moves are pre-mature because disinflationary or deflationary forces (household de-leveraging, the destruction of shadow banking, and the implosion of real estate valuations, both commercial and residential) still have the upper hand in the U.S. economy. Nevertheless, inflation is coming. It’s only a question of time.
Greater Risk over Next Five Years – Inflation or Deflation? (PDF) – The Econtrarian, Paul Kasriel, Northern Trust