"Somewhat elevated" - Stagflation - monetary policy, which acts with long and variable lags, fiscal policy works straight away

For the first time in nearly 60 years, the US government is attempting to effect fiscal stimulus to both increase social well-being and stave off geopolitical threats. 

That episode ended in high inflation. 

This time the guns-and-butter policy is global. And so, it makes sense to think inflation, and therefore interest rates, will remain somewhat elevated.

Here’s the thing. Unlike monetary policy, which acts with long and variable lags because its transmission to the economy is uncertain, fiscal policy works straight away. 

Fed and other central banks have a decision to make. Do they try and get back to 2% by making monetary so restrictive it sends us into a recession or do they accept a higher level of inflation?

What that means — with the Fed’s target fed funds rate stuck at 5.33% and 10-year yields more than three-quarters percentage-points lower — is that long-term interest rates have to rise over time.

 But higher rates generally mean more financial distress too. So we should expect the spread in yield between government bonds and other fixed income products to go up.

The 1970s was a lost decade 

Equities got savaged during the two oil shocks and the two other recessions after guns and butter was adopted before nosebleed interest rates crashed inflation with the economy.  

Two yars ago I wrote about how equities fared during the 1970s. My conclusion was that, equities did really well during the mid-1970s upturn.

From the October 1974 bottom to the November 1980 for the S&P 500 you saw a 15% annualized return during the worst inflation we’ve seen in a century.

Edward Harrison Bloomberg 17 april 2024 at 20:27 CEST


Your Equities Inflation Hedge Is in Trouble

Edward Harrison 29 mars 2022 


“Stagflation” remains a word not uttered in the polite company of the financial world.

Stephen Roach: Many of today's investors were still in diapers (blöjbarn) during the great stagflation of the 1970s.

Those who weren't will never forget the darkest period in modern financial market history."


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