Ours is a world hopelessly addicted to looking at the past. The recent past in particular. That’s how the mind of homo economicus is wired and only with hefty doses of discipline can we alter the psychological fate that otherwise awaits the crowd. And so we all look over the past 2 months or so and come to hard and fast conclusions about where we’re headed.
That includes the temptation to announce: We dodged a bullet. Yes, there’s still a lot of pain out there, and more is probably coming. But the risk of all-out catastrophe seems to have passed, leaving us with something approaching a more routine, albeit still serious downcycle in the U.S. and probably the global economy.
The stock market suggests as much. For the time being, at least, the days of 800-point rallies and declines in the Dow Industrials have been replaced with relatively mundane losses and gains. The tone is still decidedly bearish, but it’s a bear that growls without frightening the children.

In this somewhat calmer version of delevering and correction, the tolerance for minting money is still quite high. The former nurtures the latter. Understandably so, given the intense drama of the last few months. Despite the lessons of history, almost no one is worried that governments the world over are now engaged in what promises to be the mother of all liquidity injections. Again, no big surprise, considering recent (as opposed to long-term) history.
The crowd would be howling if central banks and governments were still stingy in doling out monetary and fiscal stimulus. But nothing of the kind is even remotely true now. To invoke the metaphor that gave one central banker so much grief a few years back, the helicopters are dropping money these days…big time. For the moment, the biggest problem is making sure a bag of money doesn’t fall on your head. Looking to the future and imagining something different is as popular as doing your taxes. Both are easily delayed as tasks for another day.
Eventually, and perhaps sooner than the crowd expects, this nonchalance regarding the creation of liquidity mountains will give way to something less indulgent. Like everything else in economics, timing is unknown. But the day when the markets worry in earnest about the mopping up exercise is coming, which is to say intermediate and long rates will rise and inflation’s loathsome traits make a return engagement on the lips of traders, bankers and cabbies alike.
Not now, though. Not even close. Banish the thought. Spending is in for governments. Even before the crisis of 2008, spending was set to rise in these United States to unprecedented absolute and relative levels. The future is the same, only more so now.
Meanwhile, we’re ever mindful of our tendency to extrapolate the recent past into infinity. That can lead us astray, although it’s virtually impossible to shake the habit. It’s easier to imagine otherwise. Life would surely be easier if trends lived up to their image and evolved slowly, quietly, surprising no one. In that case, using the past as a guide would be massively more productive in crafting notions about the morrow. Alas, reality is often the exact opposite for macro paradigms.
Remember $145 oil? Now it’s under $60. Remember worries about high inflation? Now we’re grappling with the threat of deflation. Six months sometimes makes all the different. Stuff happens, things change, the future looks different.
That’s not always the case, or so it appears in the short term. The reason is that most of the time the world operates fairly smoothly, which makes colossal change look impossible. Markets change modestly most days; the future looks different only on the margins. And that’s when our brains lead us astray.
With that in mind, this editor harbors the intensely unpopular belief that inflation will soon return as one of the biggest economic challenges for the planet. But not today, and probably not next year or even well beyond that. We’re undoubtedly early on this call, and probably by several years. The current and future fiscal and monetary stimuli from around the world are being absorbed in the price vacuum of disinflation and perhaps deflation. Few can imagine anything else. Maybe that’s prudent. We don’t know. But we’re also wondering where all the money will eventually go, and what effect it’ll have on pricing generally?
Such questions are moot if there’s a deep and lasting recession, a.k.a., depression. That suggests a solution to our dilemma: decide if a depression is coming, or just a garden-variety recession. Once we know that, we can determine if we should worry about future inflation or not. Easy, right?