馃敪 THE FUTURE: INFLATION vs RATES 馃敪
The next economic cycle could be characterised by geopolitical tensions, the relocation of investment and the return of some form of strong state intervention (no matter the country). This situation could be reminiscent of the 1970s [read why]. If there are supply chain constraints, it could bring more inflation, but also economic revival through the formation and creation of new ones.
The above match with suggested cycles of ≈ 35 years. At least, the US market trend has had severe moments of stagnation in that interval. Each cycle has had an expansionary trend of ≈ 19 years and a stagnation trend of ≈ 13 years. [read why]. In fact, if the same time interval is applied to the trend in interest rates, the cycles may appear clearer and have some certainty for the future.
After the WWII, a bullish cycle began under the auspices of reconstruction and the new order (1946-1981). The end of the era culminated in the conflict over oil, excessive state intervention and the end of the gold-dollar standard [read why]. Stagflation was overcome by economic liberalisation until the Pax Americana was no longer the answer to the inequality of the system (1981-2016). The next era will be characterised by a divided world and US dollar deleverage until a new hegemony sets the rules (2016-2051?) [read why].
The chart shows the cycles mentioned. If the logic is true, then the inflation and interest rate will raise along the next ≈ 35 years. The federal funds effective rate (EFFR) is the interest rate at which depository institutions lend reserve balances to each other overnight, on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve. In this case, the relevant points are between ≈ 5% and ≈ 15%.
The most important is to extrapolate that to the global system. The problem is that it will become increasingly costly for countries to acquire debt, in an environment where many are highly indebted. Governments may want to erase this effect by taking nominal GDP as the main metric, because it considers current prices, diluting inflation. Meanwhile, the big risk over the next 2 years could stem from the inversion of the yield curve [read why] and the potential normalization in the debt market. There will be a severe crisis, but not now.... The next stagflationary interval could be between 2033-2048.
The best analysis is yours!
J. Joel Padilla
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