Tuesday, May 27, 2008

Chronicles Of Depression 2.0: #110

Ambrose Evans-Pritchard is back.

Back to the 1970s, or the early 1920s?
I suspect that headline CPI inflation in North America and Europe will peak soon as the commodity spike short-circuits, and then fall hard as recession/slowdown bites deeper. It may even turn negative late next year if central banks misjudge the “feedback loop” of debt deflation.

So let me post the counter-view by Joachim Fels, joint-head of research at Morgan Stanley and one of the best minds in the City. His latest report - “Stagflation, More Than Just A Scare” - hits the nail on the head. He sees “scary parallels with the 1970s”.

“What was still a threat six months ago has become reality in the US, and is likely to arrive in Europe soon. The current stagflationary phase will turn out to be longer and more serious than most people believe.["]

Emphasis added by me.

Ambrose personally thinks this:
My schema is a little different. We could see a reply of the early 1920s, when the world system split in half as they faced the policy ructions following the Great War.

Germany, France, Belgium, and Poland (I believe, I write from memory) all opted for varieties of hyperinflation, either because it was the lesser of evils or because the political pressures were overwhelming (Germany had little to gain from discipline: the hyperinflation was unanswerable proof that the Versailles reparations were unpayable).

The US, the British Empire, Italy, and (I think) the Scandies, opted for various levels of deflation linked to pre-war Gold Standard parity. The contrast was extraordinary.

Could this divergence occur in a modern global economy with (mostly) floating currencies? The emerging world inflates into the stratosphere; the Atlantic economies and Japan go into a deflationary slide?

I will make tentative bet that this can indeed occur. Tentative, mind you.

A deflationary slide mirroring the 1920s just isn't possible in America.

Not with oil well over $100/barrel.

Not with international competition for food.

If those two things actually deflate -- and do so quickly and massively -- then it's the 1920s.

Until then, it's the 1970s.

Either way, none of us will like it.

In the meantime, get an education.

No comments: