Page 55 - COVID-19: The Great Reset

level inflation becomes corrosive and a source of obsessive
concern for consumers.

For the moment, some fear deflation while others worry about
inflation. What lies behind these divergent anxieties for the future?
The deflation worriers point to a collapsing labour market and
stumbling commodity prices, and wonder how inflation could
possibly pick up anytime soon in these conditions. Inflation

worriers observe the substantial increases in central bank balance
sheets and fiscal deficits and ask how these will not, one day, lead
to inflation, and possibly high inflation, and even hyperinflation.

They point to the example of Germany after World War I, which
inflated away its domestic war debt in the hyperinflation of 1923,
or the UK, which eroded with a bit of inflation the massive amount
of debt (250%) it inherited from World War II. These worriers
acknowledge that, in the short term, deflation may be the bigger

risk, but argue that inflation is ultimately unavoidable given the
massive and inevitable amounts of stimulus.

At this current juncture, it is hard to imagine how inflation could
pick up anytime soon. The reshoring of production activities could

generate occasional pockets of inflation, but they are likely to
remain limited. The combination of potent, long-term, structural
trends like ageing and technology (both are deflationary in nature)
and an exceptionally high unemployment rate that will constrain

wage increases for years puts strong downward pressure on
inflation. In the post-pandemic era, strong consumer demand is
unlikely. The pain inflicted by widespread unemployment, lower
incomes for large segments of the population and uncertainty

about the future are all likely to lead to an increase in
precautionary savings. When social distancing eventually eases,
pent-up demand could provoke a bit of inflation, but it is likely to
be temporary and will therefore not affect inflation expectations.

Olivier Blanchard, the former chief economist of the IMF, thinks
that only the combination of the following three elements could
create inflation: 1) a very large increase in the debt to GDP ratio,
larger than the current forecast of 20-30%; 2) a very large

increase in the neutral rate (i.e. the safe real rate required to keep
the economy at potential); and 3) fiscal dominance of monetary

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