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Tuesday, June 8, 2021

Structural Change Handicapping

The finish line of the big project that has kept me busy is in sight, and I am starting to get back into thinking about writing. I have been scanning the news, trying to get a feel of the data flow and what is on people's minds. Rather than dive into details, I just wanted to give some high level impressions.

From my perspective, I am in the position of literally talking my book. My latest - Modern Monetary Theory and the Recovery - discusses the structural issues that bias the developed economies towards sluggish growth with steady inflation.

This bias is not what excites people in market commentary -- to many, the developed world is consistently on the edge of accelerating inflation. To a certain extent, mainstream economics is to blame. The unquestioned belief is that the economy responds to real interest rates, and so if inflation picks up, real interest rates fall further (assuming nominal rates are slow-moving), causing inflation to spiral out of the control.

If we look at internet Austrians, crypto-bugs, and anyone who looks at the money supply, this perpetually being on the knife edge of inflation is exciting (and sells books, newsletters, and collectibles). Throughout my career in finance (and even before), the correct view instead was to bet on boredom (not counting financial crises and their side effects). My book discussed the sources of this boredom, and why one might want things to change. The question was: did the disruptions of the pandemic coupled with the relatively aggressive policy response change things? I do not have an official view on this.

However, given my analytical bias, it is unsurprising that my impression is that the pandemic-related disruptions are starting to roll out of the data, and things are returning to something resembling normalcy. Of course, financial markets are jumping around -- which is exactly what they have been doing for decades. Bubbles led by deranged cheerleaders are in fact what passes for normal in modern economies.

With having more time available, I will be in a better position to dig somewhat further into the data. Given the topic of my next planned book, the focus will be on inflation data.

(c) Brian Romanchuk 2021

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