Instead of making up words, let's call it what it is. We are being fucked over, rooked,
manipulated, conned, and molded by fear into accepting whatever fascist shit
our 'glourious overlords' (the puppet masters of society and economy) have
in store for us. They always did this, but in recent years they have upped their game.

Inflation is back, and it is rising sharply, especially over the past
year, owing to a mix of both demand and supply factors. This rise in
inflation may not be a short-term phenomenon: the Great Moderation of the
past three decades may be over, and we may be entering a new era of Great
Stagflationary Instability.

Unless you are middle-aged and gray-haired, you probably hadn�t heard
about the term stagflation until very recently. You may have barely heard
about inflation. For a long time, until 2021, inflation�the increase in
prices year to year�was below the advanced economies� central banks�
target of 2%. Usually inflation is associated with high economic growth.
When aggregate demand for goods, services, and labor is strong, coupled
with positive animal spirits, optimism about the future, and possibly
loose monetary and fiscal policies, you get stronger than potential
economic growth and higher than target inflation. Firms are able to set
higher prices because demand outstrips supply, and workers receive higher
wages given a low unemployment rate. In recessions, on the other hand, you
have low aggregate demand below the potential supply of goods, which leads
to a slack in labor and goods markets, with ensuing low inflation or even
deflation: prices go down as consumers� spending declines. Stagflation is
a term that refers to high inflation that happens at the same time as
stagnation of growth or outright recession.

But sometimes the shocks hitting the economy, rather than coming from
changing demand, can come from the supply side: an oil-price shock, say,
or a rise in food or other commodity prices. When that happens, energy and
production costs rise, contributing to lower growth in countries that
import that fuel or food. As a result, you can get a slowdown of growth,
or even a recession, while inflation remains high. If the response to this
negative supply shock is loose monetary and fiscal policy�banks setting
low interest rates to encourage borrowing�to prevent the slowdown in
growth, you feed the inflation flames by stimulating rather than cooling
demand for goods and labor. Then you end up with persistent stag-flation:
a recession with high inflation.

In the 1970s we had a decade of stagflation as two negative oil shocks and
the wrong policy response led to inflation and recession. The first shock
was triggered by the oil embargo against the U.S. and the West following
the 1973 October War between Israel and the Arab states. The second shock
was triggered by the 1979 Islamic revolution in Iran. In both cases a
spike in oil prices caused a spike in inflation and a recession in the
oil-importing economies of the West. The inflation was fed by the policy
response to the shock because central banks did not rapidly tighten and
impose strong monetary and fiscal policy to contain the inflation. So we
ended up with double-digit inflation and a severe recession that doomed
the presidencies of Gerald Ford and Jimmy Carter. It took a painful
double-dip recession in 1980 and again in 1981�1982 to break the back of
inflation when Fed Chairman Paul Volcker raised the interest rates to
double-digit levels.

Coming after the stagflation of the 1970s and early 1980s, the Great
Moderation was characterized by low inflation in advanced economies;
relatively stable and robust economic growth, with short and shallow
recessions; low and falling bond yields (and thus positive returns on
bonds), owing to the secular fall in inflation; and sharply rising values
of risky assets such as U.S. and global equities.

This extended period of low inflation is usually explained by central
banks� move to credible inflation-targeting policies after the loose
monetary policies of the 1970s, and governments� adherence to relatively
conservative fiscal policies (with meaningful stimulus coming only during
recessions). But more important than demand-side policies were the many
positive supply shocks, which increased potential growth and reduced
production costs, thus keeping inflation in check.

During the post�Cold�War era of hyper-globalization, China, Russia, India,
and other emerging-market economies became more integrated in the world
economy, supplying it with low-cost goods, services, energy, and
commodities. Large-scale migration from the poor Global South to the rich
North kept a lid on wages in advanced economies; technological innovations
reduced the costs of producing many goods and services; and relative
geopolitical stability after the fall of the Iron�Curtain allowed for an
efficient allocation of production to the least costly locations without
worries about investment security.

The Great Moderation started to crack during the 2008 global financial
crisis and then finally broke during the 2020 COVID-19 recession. In both
cases there were severe recessions and financial stresses, but inflation
initially remained low given demand shocks; thus, loose monetary, fiscal,
and credit policies prevented deflation from setting in more persistently.

But this time it�s different, as inflation has been rising since 2021, and
many serious and important questions are now emerging and being debated by
economists, policymakers, and investors. What is the nature of the current
inflation? How persistent will it be? Is it driven by bad policies�loose
monetary and fiscal policies�or bad negative aggregate supply shocks? Will
the attempt of central banks to fight inflation lead to a soft landing or
a hard landing? And if the latter, will this be a short and shallow
recession or a more severe and protracted one? Will central banks remain
committed to fight inflation, or will they blink and wimp out and cause
persistent long-term inflation? Is the era of Great Moderation over? And
what will be the market consequence of a return to inflation and
stagflation?

First question: Will the rise in inflation in most advanced economies be
temporary or more persistent? This debate has raged for the past year, but
now it is largely settled: �Team Persistent� won, and �Team
Transitory��which included most central banks and fiscal authorities�has
now admitted to having been mistaken.

The second question is whether the increase in inflation was driven more
by bad policies (i.e., excessive aggregate demand because of excessively
loose monetary, credit, and fiscal policies), or by bad luck
(stagflationary negative aggregate supply shocks including the initial
COVID-19 lockdowns, supply-chain bottlenecks, a reduced U.S. labor supply,
the impact of Russia�s war in Ukraine on commodity prices, and China�s
zero-COVID policy). While both demand and supply factors were in the mix,
it is now widely recognized that supply factors have played an
increasingly decisive role. This matters because supply-driven inflation
is stagflationary and thus increases the risk of a hard landing (increased
unemployment and potentially a recession) when monetary policy is
tightened.

That leads directly to the third question: Will monetary-policy tightening
by the U.S. Federal Reserve and other major central banks bring a hard
landing (recession) or a soft landing (growth slowdown without a
recession)? Until recently, most central banks and most of Wall Street
were in �Team Soft Landing.� But the consensus has rapidly shifted, with
even Fed Chair Jerome Powell recognizing that a recession is possible and
that a soft landing will be �very challenging.�

Will the coming recession be mild and short-lived, or will it be more
severe and characterized by deep financial distress?

A model used by the Federal Reserve Bank of New York shows a high
probability of a hard landing, and the Bank of England has expressed
similar views. Several prominent Wall�Street institutions have now decided
that a recession is their baseline scenario (the most likely outcome if
all other variables are held constant). Indeed, in the past 60 years of
U.S. history, whenever inflation has been above 5%�it is now above 8%�and
the unemployment rate below 5%�it is now 3.7%�any attempt by the Fed to
bring inflation down to target has caused a hard landing. So,
unfortunately, a hard landing is much more likely than a soft landing in
the U.S. and most other advanced economies.

The Fourth question: Are we in a recession already? In both the U.S. and
Europe, forward-looking indicators of economic activity and business and
consumer confidence are heading sharply south. The U.S. has already had
two consecutive quarters of negative economic growth in the first half of
this year, but job creation was robust, so we weren�t yet in a formal
recession. But now the labor market is softening, and thus a recession is
likely by year�s end in the U.S. and other advanced economies.

Now that a hard landing is becoming a baseline for more analysts, a new
fourth question is emerging: Will the coming recession be mild and short-
lived, or will it be more severe and characterized by deep financial
distress? Most of those who have come late and grudgingly to the hard-
landing baseline still contend that any recession will be shallow and
brief. They argue that today�s financial imbalances are not as severe as
those in the run-up to the 2008 global financial crisis, and that the risk
of a recession with a severe debt and financial crisis is therefore low.
But this view is dangerously naive.