Yellen Is Wrong: Economist Who 'Wrote The Book' On No-Flation Sounds Alarm Over Policymaker Complacency

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by Tyler Durden
Tuesday, Jun 08, 2021 - 09:45 AM

A week ago, none other than Larry Fink poured an illiberal amount of cold water on the current inflationary narrative being spewed by Powell, Yellen, and their lackeys in academia.

The Blackrock CEO - who happens to manage more than The Fed at last check - countered soothing talk that soaring prices are here and gone tomorrow, and said that investors may be underestimating the potential for a spike in inflation.

"Most people haven’t had a forty-plus year career, and they’ve only seen declining inflation over the last 30-plus years. So this is going to be a pretty big shock", Fink said, his warning falling on deaf ears.

Alas, unlike the Fed, Fink actually know what he is talking about: he began his career at First Boston Corp. in 1976, in during runaway US inflation, with the Consumer Price Index hitting a high of 14.8% in March 1980, and forcing Volcker to hike rates as high as 20%.

Treasury Secretary Yellen was quick to dismiss this fearmongering malarkey by claiming that while she may, possibly, kinda, sorta see higher prices, it will be transitory (because The Fed is awesome) and besides, America... it's all good!

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said in an interview with Bloomberg. And yes, she really said that.

That is very much not the mantra that Roger Bootle, who - a quarter century after writing the book on the death of inflation - is now warning that he is seeing signs of its reignition.

It is the start of a sea change, I have to say. That’s not to say that we’re going to go back to the strong inflationary conditions of the 70s and early 80s. But at the very least, I think we are at the end of the crypto-deflationary period that we’ve been in for the last few years.

“The danger of deflation has passed, and the risks have definitely tilted in the other direction. How high inflation will go, and for how long, that’s debatable. But I’m not in much doubt myself that there’s been a sea change.”

However, for the real worry-warts, Bootle does not expect 1970s-style inflation...

No, the comparison with the 1970s is not a good one. If you look at the long term history of inflation, and I’ve looked at the U.K. data going back to the 13th century, you don’t get ever a sustained period of inflation of the sort we had 1970s. You do get bursts of inflation, typically followed by much lower rates or even deflation.

The 1970s were special. First of all, you started off at a quite a high base rate of inflation. And then several shocks appeared, two oil price shocks. The settings of monetary and fiscal policy were extremely loose. And all of this in an institutional context that was conducive to inflation -- very powerful trade unions, powerful corporations, a high rate of public ownership in this country and many others.

A closer comparison is with the 50s and 60s before the inflationary take off at the end of the 60s. We then went through a long, a prolonged period of what seemed at the time by the way to be quite high inflation -- we learned subsequently it wasn’t.”

So, to summarize, in the last month or so the official narrative has shifted from inflation will be "transitory" to "inflation is good for society"...

... and the beneficiary is (drum roll please): the environment.

As Bootle explains:

“If I had to put my money on a single factor that was going to push up costs in the years to come, I would say it was the environmental emphasis and in particular the drive towards net-zero. This is going to lead to a whole series of costs and price increases across the economy."

His explanation fits with Fink's previous climate change view on higher prices...

"If our solution is entirely just to get a green world, we’re going to have much higher inflation, because we do not have the technology to do all this, yet,” Fink said.

“That’s going to be a big policy issue going forward too: Are we going to be willing to accept more inflation if inflation is to accelerate our green footprint?”

And don't bank of the bankers to save the world...

“I’m not sure complacency is quite the right word. I think it’s over-optimism with regard to inflation, but on two counts. One that’s it’s not going to go up that much, at least not sustainably. And two, if it does, as and when they need to, they’re going to be able to contain it.

Policymakers have a natural inclination to lay off and think it’s all going to get sorted out. I think actually the conclusion ought to be quite the opposite. Because of the dangers, in this world, of big rises in interest rates, they ought to start rising raising interest rates sooner and moving by low amounts stealthily, in order to get interest rates up somewhere near a more normal level rather than being forced into it.”

All of which dismantles Yellen's extreme overconfidence that monetary policy makers can handle any potential rise in inflation if it sticks. “I know that world - they’re very good,” Yellen said in the interview. “I don’t believe they’re going to screw it up.”

This is the same clueless hack who in 2017 said she doesn't expect another financial crisis in "our lifetimes."