The Economist Joins Shulmaven in Forecasting Regime Change

The October 8^th Economist titles its lead article “Regime Change” where it forecasts a pivotal moment for global economic policy that calls for a much tighter monetary policy combined with a much looser fiscal policy. (See: Regime change | Oct8th 2022 | The Economist, Paywall.)  The article notes that the monetary authorities will have a difficult time bringing down inflation to their 2% target and, as a result, a more relaxed 4% target would be in order. The author also believes that the savings glut of the past two decades will return in the post-Covid environment.

 

Although we completely agree that a regime change is coming which is being signaled by the global bear market in stocks and bonds, our regime is far different from theirs. (See: Shulmaven:The U.S. Economy is Entering a New Thirteen Year Cycle and Shulmaven:Higher Inflation and Higher Interest Rates: Get Used to it )  In our regime, far from having excess savings, we envision a capital spending boom based on deglobalization, energy transition, and climate resilience. Economists have under-estimated the deflationary effects of the globalization of the economy over the past three decades. Those effects are now going into reverse thereby undoing the salutary effects of the international division of labor.

 

Further inflationary pressure will come from a demographically based shortage of labor and real wages catching up from the 3+% decline in the U.S. that occurred this past year. Throw in rising defense spending and you have a formula for higher inflation and with that a structural rise in interest rates. Although we and The Economist end up with higher inflation, we get there in a far different way.