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The extraordinary thing about rates is not how high they are but how low

 They will have to increase much more to get inflation sustainably lower.

A big reason for the expected drop in inflation is that investors big and small were used to a world in which disinflation seemed more of a problem and think it won’t take much to bring it back.

The same is true of central banks and, strange as it may seem, they still have a lot of credibility.

Broadly speaking, these views are supported by three main arguments. 

The first is that you can’t get much inflation given the unprecedented amounts of debt outstanding in the world today.

The second argument is that the amount of money sloshing around in developed economies is rapidly slowing. It confuses stocks and flows. 

While money growth is indeed slowing, the stock of money remains very high.

The third argument is that slower economic growth will bring inflation rates down.

Perhaps the reason for getting it so wrong over the past couple of years is because they have the wrong diagnosis both of what happened in the 1970s and what has been happening these past few years. 

The 1970s inflation started long before the first oil shock and continued long after its effects petered out. 

For now, the gap between short-term term rates and inflation has never been wider. This is why one would struggle to find any model which churned out a required rate to slow inflation at anything like their current levels. 

I simply cannot imagine Karl Otto Poehl, the president of Germany’s mighty Bundesbank from 1980, being anything other than derisive (föraktfull) about what is currently being priced into markets. 

Richard Cookson Bloomberg 13 oktober 2022


ECB The real goal of policy makers is keeping the euro zone’s weakest members from leaving the currency union

Richard Cookson Bloomberg 13 juni 2022 


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