These days economists are divided between those who think – a narrow majority, but a majority nonetheless – that inflation will be a temporary phenomenon, and that the real risk lies in a premature withdrawal of stimuli, and those who believe that increases Prices are here to stay and there is no time to lose to correct course. The World Bank’s chief analyst, Carmen Reinhart (Havana, 66 years old), is clearly on the second side. “In life there are few permanent things, but I do not see inflation as something transitory: there may be persistence,” warns the American economist of Cuban origin, who long before landing on the multilateral – where she has just been promoted to the rank of vice president – he was highly respected in the academy. The talk, a video call he answers from his home in Washington, lasts for just over half an hour. She is direct and does not shy away from any question.
Question. After several years off the map, inflation has returned strongly. Is it a temporary rally or something else?
Answer. If you listen to central banks, all this inflation is transitory. But I see it more complicated. The pandemic has not only had a huge impact on aggregate demand, as happened in the financial crisis of 2008 and 2009, but it also has many effects on the supply side. In the background there is also the scale of global monetary expansion, which has already increased barbarously after the previous crisis and in which we now have another even greater leap.
P. Some see parallels with the 1970s.
R. Then the drama was well defined: the shock supply was the price of oil. Now we don’t have a single shock supply, but many: we see it in international trade, in the shortage of some products … In life there are few permanent things, but I do not see inflation as something transitory: it can be persistent or, at least, more than what central banks believe right now. And the longer it persists, the more expectations will be adjusted. If this continues, the arguments that [la subida de precios] it is due to the effect compared to an exceptional 2020 are less valid.
P. What do the Federal Reserve and the ECB have to do? Inflation today has a huge energy component, and that is not fixed either by raising rates or reducing debt purchases …
R. They have a great dilemma before them. They have not lost independence by right, but they are much more limited de facto: if there is a shock The adverse response is always the stimuli, but the same does not occur when reversing them. The debt of the private sector is very high and a good part is high risk, the debt of the governments has also skyrocketed … All this creates a political tension, which goes beyond the economic. And then there is the question of whether what we have in the stock market is a bubble, and nobody wants to be the governor of the central bank who takes the pin and pricks it. All this leads to the bias of the large central banks being to follow the market and act late rather than early. [en la retirada de los estímulos].
P. Are you worried that they are not moving token already?
R. It is part of my expectation that inflation is going to have a much more persistent component. If central banks are in doubt about what to do, they will wait rather than act. And that is a factor that allows inflation to escalate.
Be careful with the financial risks that monetary policy is feeding
P. You are asking for a faster withdrawal of stimuli. But that, as the 2013 episode shows, when it unleashed a capital stampede, is a risk of the first order for emerging markets.
R. There are two big risk factors for them: that the Federal Reserve begins to raise the interest rate or that there is an even greater slowdown in China. I am not saying that monetary policy should be tightened prematurely: what I am saying is that in advanced countries, in which the fiscal stimulus has been very large and in which the recovery and vaccines are already in a much more advanced cycle , it’s time to think. The bubbles feed off each other: the more liquidity there is, the more incentives there are also for corporations to issue low-quality debt. That makes the market have more and more bubble elements. You have to be careful with the financial risks that monetary policy is feeding.
P. Inflation also has a much kinder face: it has historically been one of the most effective ways to liquidate debt.
R. Particularly after World War II, when several European countries and the US were left with tremendous levels of debt, part of the solution was inflation and financial repression. Now we have had a decade of financial repression, with negative real interest rates. It is true that inflation helps, but it does not solve everything: it must be accompanied by a certain fiscal discipline, and at the moment that is much more difficult: reducing transfers is much more difficult politically than cutting war spending, as it was then. And, above all, inflation worries me for another issue: because it is a regressive tax that hits the poor especially hard and that comes right after a shock like that of the covid, in itself very regressive.
P. One of the most talked about dangers at the beginning of the crisis was that of a cascade of corporate debt defaults and that banks could not withstand the pressure. But neither has materialized. Can that risk be ruled out now?
R. No, it cannot be ruled out. We are in a period in which global liquidity reaches historic proportions. The monetary stimulus gives rise to cover many risks that will manifest themselves if conditions change: because inflation is higher than is believed, because growth is lower … That would lead to a reassessment of risks. It is true that banks are in a much better position than in 2008, but companies are another matter: they are much more indebted and with a lower caliber of debt in every way. At this time, it is unwise to underestimate the balance sheet risks we have, which are large. Excess liquidity leads to other types of excesses, and it is easy to go from boom to bust.
P. One of his most iconic works, a four-handed investigation with Kenneth Rogoff in 2010 [que recibió importantes críticas y que les obligó a publicar una corrección formal], concluded that a public debt above 90% of GDP stifles growth. Today, the eurozone average is clearly above 100% and that of advanced economies is around 130%.
R. It’s not that we’ve grown dramatically since then either, have we? Greece and Italy today have an income per capita lower than when the 2008 crisis began. Although debt tolerance has increased in the last decade because the interest rate has remained at exceptionally low levels, growth has been quite weak. If the real interest rate increases, even slightly, it will have an effect on growth.
P. What solution do you see, then, to that debt?
R. There is no fancy way to reduce it: there are no silver bullets, except to grow. And growing up is not going to be easy. I see more taxes: I think part of that correction is going to be through higher taxes.