The Jackson Hole stakes went beyond the current inflation crisis

Last week, I attended the annual meeting of the US Federal Reserve in Kansas City alongside US Federal Reserve Chairman Jerome Powell and other central bankers, policymakers and economists. This year’s rally, the first to take place in person since the pandemic, took place against the backdrop of a weak global outlook, widespread fears of recession and threats of ever-higher inflation. The US Fed has sought to reassert its credibility as a serious inflation fighter. But because soaring prices are due to such a variety of factors, the effectiveness of monetary policy can be limited.

For example, massive levels of quantitative easing (asset purchases by the central bank), multiple rounds of government stimulus checks to households, and a persistently low interest rate environment (dating back to the 2008 financial crisis ) have intensified the post-covid increase in aggregate demand for tradable goods and services. And asset appreciation, particularly in real estate and stock portfolios, has generated additional wealth effects, boosting consumption by people who feel wealthier.

Conventional tightening of monetary policy is largely about destroying demand. When a central bank raises interest rates and reduces the money supply by reducing its monthly asset purchases, these measures should cancel out – or at least dampen the growth of – aggregate demand.

But monetary policymakers can’t do much about the supply-side factors that are also fueling inflation. We should therefore not be too optimistic about the Fed’s ability to bring inflation back to its target range of 2% per year.

Many supply-side factors are external to the United States. In China, the world’s largest supplier of goods and services, the government’s “zero covid” policy has severely restricted daily life and reduced production. And, globally, unprecedented heat waves, labor shortages, and travel and logistics complications have further disrupted supply chains. with labor force participation rates not returning to pre-pandemic levels, difficulties in hiring have hampered the ability of businesses to meet demand for their goods and services. remote work have all fueled concerns about a reduced potential labor supply and higher wages.

And, of course, Russia’s war in Ukraine has fueled severe energy and food shortages and price spikes, compounding many problems caused by years of underinvestment in hydrocarbon production and refining capacity. Due to the rapid rise of ESG (Environment, Social and Governance) investing, trillions of dollars of capital investment have been diverted from the traditional energy sector, setting the conditions for today’s heightened energy security concerns and volatility. prices, particularly in oil and gas.

Admittedly, interest rate increases can have indirect effects on these supply-related price increases. For example, a Fed-induced slowdown or recession could change workers’ attitudes toward available work opportunities, thereby easing labor supply issues. But for the most part, these supply-side factors are beyond the Fed’s direct reach.

As such, policy makers in government, business and finance should start preparing for a world of tenacious mid-digit inflation. After years of inflation below central banks’ target rate, this change will have big implications for how capital holders model risk and allocate investments. Rising costs of capital (due to rising interest rates) could not only translate into higher cash outflows for businesses (to pay for rising liabilities and debts, for example); they will also limit corporate risk appetite, which will reduce investment.

After all, broader global trends toward de-globalization and Sino-American decoupling mean that the win-win outcomes offered by globalization may no longer be available. It may now be more prudent to take a zero-sum or win-lose perspective. All the basic assumptions of the old models – from the reliability of cheap capital and a global transport trade to the free movement of goods and workers and multilateralism in international affairs – have been called into question.

As the global economy becomes balkanized, businesses and investors will be less able to diversify into global markets. Portfolio positions will therefore become more concentrated, increasing the need for higher rates of return. In practice, this means that investment flows are likely to shift from emerging economies and struggling Europe, with investors choosing between the United States and China.

Overall, the debates over current inflation and the coming months of monetary policy changes threaten to distract from these larger trends. Major economic cracks are emerging that will force business and government leaders to bet more on specific regions as global risk appetite declines.

Inflation matters, of course. But global populations will be better served if economic policymakers focus more on how the investment landscape and capital allocations will look in a de-globalizing and de-financializing economy. ©2022/Syndicate Project

Dambisa Moyo is an international economist and author of “Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth—and How to Fix It.”

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