The world is in a dangerous position. Employment is generationally weak, and in response to the weak-by-choice economy, governments and central banks have opted for massive spending, historically low interest rates, and exploded central bank balance sheets financed by printing money.
What do these things mean in the not-too-distant future? Problems.
The jobs picture
First, let’s take a look at the inflation and jobs backdrop. The jobs backdrop, depicted below by the year-over-year change in the unemployed by country from 1980 through the second quarter of 2020, looks incredibly sobering. On average, the pool of the unemployed across countries is up 67% over the prior year. In the U.S., the figure is 256%.
It’s hard to put lipstick on this pig.
The backdrop of inflation
While the reserve pool of the unemployed is generationally high, inflation around the world is at also incredibly low. In most countries, inflation is actually deflation or disinflation.
When looking across all countries, the inflation picture is clearer than having a color for each line. On average, global inflation is close to its all-time low at 2.25% (Q2 2020). The only other time in the past 40 years when inflation was this low was Q3 2009, right before the start of the longest expansion on record.
The three problems
The question now concerns whether global economies can avoid quick rising inflation if global economies fail to rise quickly. Typically, the question is posed the other way. Usually, economists are concerned that inflation will rise quickly because economic growth is too strong. This time around, if global growth does not seriously pick up in the next couple of months (in the U.S., it’s July), then governments will be forced to pump more stimulus into this economy. Central banks will be forced to continue printing money.
Since 2008, central banks and governments have opted for this practice. And, surprisingly to some, the massive money printing and debt did not spur greater inflation. There are likely three reasons for high inflation failing to materialize: intense international competition of labor, globalization, and weak global conditions.
This time around, the story is different and for two reasons. First, political forces are moving towards less globalization, opting instead for shorter supply chains. Second, the scale of the spending and money printing operations were nowhere near as massive.
This time is different, and any respectable analyst will agree after looking at the following three charts. Due to demographic forces and politics, interest rates may never again get back to normal levels. Financial markets will also likely be unwilling to let central banks reduce their balance sheets too much. And there’s no evidence that governments want to improve their spending habits any time soon.
These three factors make for a dangerous combination of economic factors that may rear their ugly head simultaneously in the near future.
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