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Opinion: To avoid stagnation, the Fed needs to reduce QE and Congress needs to fix investment in infrastructure.


Cambridge, UK (Project Syndicate) একটিA series of recent data indicates that the global economy is showing signs of stagnation, a mixture of bizarre inflation and declining growth in the 1970s. Those who have noticed this – and still very few of them – fall into two broad camps. Some see the phenomenon as temporary and rapidly changing. Others fear it will lead to a new era of unsatisfactory growth, but this time with volatile high inflation.

But a third scenario, which attracts both of these perspectives, is probably the most admirable. Stable winds are more likely to be part of the upcoming journey of the global economy than the characteristics of its destination. But how policymakers embark on this journey will have a major impact on long-term economic well-being, social cohesion and financial stability.

High inflation is putting pressure on central banks who want to maintain exceptionally loose monetary policy. All of this has risked eroding political support for much-needed monetary and structural policies to increase productivity and long-term growth prospects.

The much-needed global economic recovery has been losing steam recently as its two major locomotives, China and the United States, have dampened growth and downturn expectations.

A more contagious delta of the coronavirus has reduced costs in some sectors, such as alternative leisure and transportation, while hampering production and shipments, especially manufacturing. In a growing number of developed economies, labor shortages are becoming more widespread. Add to that the shortcomings of a shipping-container and the constant reorganization of the supply chain, and it is not surprising that higher and more persistent inflation is taking place as we move towards a stronger and more sustainable global recovery.

High inflation

High inflation is putting pressure on central banks who want to maintain exceptionally loose monetary policy. At the same time, slowing economic growth presents a problem for central banks that are more inclined to scale stimulus measures. All of this has risked eroding political support for much-needed monetary and structural policies to increase productivity and long-term growth prospects.

The risk of inflation expectations becoming volatile, directly undermines the low-volatility instance that has helped push financial-asset prices further.

Some economists and the majority of policymakers believe that the current stagnation trend will soon become a nuted term as a result of changes in market power and human behavior. They point to the recent decline in the price of sticks previously as an indication of how competition and increased supply will reduce inflation. They believe that the sharp decline in delta-alternatives in the United Kingdom predicts the future of the United States and other countries in the wake of the recent Covid-1 wave. And they take comfort from signs of an increase in corporate investment in response to supply disruptions.

Others are more pessimistic. They argue that the demand will increase because of the reduction in financial schemes that support the family’s income, citing the benefits of increased unemployment and the expiration of direct cash transfers. They are also concerned about the gradual exhaustion of unexpectedly accumulated cash buffers as a result of extraordinary generous government assistance during the epidemic.

On the supply side, stagnation pessimists welcome high business investment but fear that its benefits will not come fast enough, especially since supply chains are being re-directed. The supply disruption will therefore last much longer in their eyes, and the central banks will lag behind in responding to the necessary policies.

I suspect that none of these scenes can influence the time ahead. But that will affect the options they implement.

Timely and integrated response

Ideally, policymakers would respond in a timely and self-empowering manner to the growing evidence of stagnation. The Federal Reserve has already enabled some of its final monetary policy and the administration of Congress President Joe Biden to move forward with plans for U.S. productivity and long-term growth. Human infrastructure.

Meanwhile, national and international financial authorities will make better coordination to strengthen prudent control, especially as it relates to taking additional risks among non-bank market participants.

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These measures will lead to inflationary pressures, faster and more inclusive growth and real financial stability. And such a desired result can be achieved if the necessary policy response proceeds comprehensively and in a timely manner.

In the absence of such a response, supply-side problems will become more structured in nature, and therefore protracted beyond the expectations of the transit camp. As a result, inflationary pressures will be exacerbated by higher wages, which many companies will have to offer in order to attract the workers they currently need and retain the workers they have.

As central banks lag behind in their policy response, the risk of inflation expectations becoming volatile, directly undermining the low-volatility instance that has helped push financial asset prices to the SPX,
+ 1.21%

DJIA,
+ 1.31%

GDOW,
+ 1.09%
Ever higher.

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Because the Fed will then be forced to hit a policy break, high inflation is less likely to persist. Unfortunately, this reduction will come at the cost of lower and less inclusive growth, especially if the Biden administration’s plans are stuck in Congress (which will probably be more in the event of high-inflation). Instead of long-term stagnation, the global economy will repeat what it felt after the 2008 global financial crisis: low growth and low inflation.

The recent stagnation trends serve as a timely reminder of the urgent need for broader economic-policy measures. The sooner such a response is implemented, the greater the chances of economic recovery, social welfare and increased financial stability.

But if policymakers delay, the world economy will not be protected by self-correcting forces or trapped in a stalemate. Instead, the world will return to the “new normal” of economic weakness, strong social cohesion and financial instability.

Mohammed A. L. Arian, president of Queen’s College, Cambridge University, is a former chairman of President Barack Obama’s Global Development Council. He was one of the top 100 global thinkers on foreign policy for four years. He is the author of two bestselling New York Times articles, including The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

This comment was published with the permission of Project Syndicate – Taming the Stagflashantry Winds

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