Where Will The Next Deflationary Shock Come From?
The comments below are an edited and abridged synopsis of an article by Louis-Vincent Gave
Today, as inflation expectations move toward generational highs, where might the next deflationary shock come from? Gave discusses Europe; commodities; the US dollar; the renminbi; and US real estate.
In the next few years, the usual suspects that previously unleashed deflation are more likely to raise the inflationary temperature. Hence, if deflationary forces are going to carry the day, there will need to be impressive productivity gains. Somewhere in the system, someone will have to produce a whole lot more, with a whole lot less. But is this likely, given the following trends that have been covered in recent Gavekal reports?
1. Globalization rollback: Productivity gains from outsourced production are under threat as their true social costs have become more apparent.
2. Semiconductor shortage: Robots have been touted as replacements for low-end labour everywhere but as car factories are shuttered for lack of chips, one has to wonder where robot-makers will find the semiconductors they need to build the robots that will then build the cars.
3. Labour markets: Workers across Western economies are being incentivized to stay home and, unsurprisingly, wages are starting to rise. Indeed, 2020 saw the first meaningful US recession in which wage growth barely fell.
We can see that the price of everything (meat, corn, gasoline, lumber, shipping rates) will rise without a clear countervailing deflationary force. In an environment of rising government intervention, expanded public handouts, higher corporate taxes and more protectionism, it is possible that a surge in productivity will provide an offset to the growing inflationary wind. However, this seems to represent the triumph of hope over experience.