A Keynesian Golden Age Of 1960s More Likely Than Stagflation Of 1970s: Anatole Kaletsky
A welder uses a welding torch on a metal structure.( Photographer: Chona Kasinger/Bloomberg)

A Keynesian Golden Age Of 1960s More Likely Than Stagflation Of 1970s: Anatole Kaletsky

While there’s general consensus that a global economy flush with liquidity will (eventually) fuel inflation, Anatole Kaletsky of Gavekal Research says that it will be coupled with a period of rapid growth.

“Everyone agrees that there will be higher inflation at some point of time in the future,” said Kaletsky, co-founder of Gavekal Research, an independent provider of global investment research. “But the key question is whether the world is going to have rapidly higher inflation before the clampdown in monetary and fiscal policy like the late 1960s, and if so, could we enter into a period of stagflation like the period that we saw in the 1970s?"

A section of economists is sold on the idea of a rapid rise in inflation, Kaletsky said in an interview with BloombergQuint’s Niraj Shah. But there exists another possibility: one of inflation inching up very slowly, and thus the stimulus measures unleashed finding their way, not into higher prices, but faster growth in real economic activity, he said.

While few economists are speaking about this scenario, equity markets and other asset classes are sniffing the possibility, according to him.

Global central banks injected liquidity into the economy to cushion the impact of the pandemic that’s caused a worldwide recession. And they are willing to continue with easy-money policies to accelerate a rebound.

The willingness of the governments across the world to take on sizeable debt and ability of central banks to finance this debt at zero rates suggests a complete change in the philosophy of policymakers around the world, which feed into the behaviour of the financial markets, Kaletsky said. This, according to him, will continue to have a profound impact on equity markets and other risk assets for the future.

A combination of 6-8% nominal growth, which Kaletsky foresees in the next 24 months, and the continuation of zero interest rates point to valuations of real value assets like equities, real estate, and commodities to be higher than where they are currently.

Emerging markets would outperform developed peers, he said. EMs have hardly gained in dollar terms in the last decade, especially post 2013, while the U.S. markets have done well, he said. “The gap between is wide, and unsustainable, and thus will not stay for long.”

But Kaletsky’s optimism comes with caution about risks. Recovery expectations are now high enough to justify a moderate concern as the second and third waves of Covid-19 devastate the first quarter’s economic and corporate data, he said.

Geopolitics could be another concern as U.S.-China spat continues even under the Biden administration and some kind of Middle East turmoil is likely as Saudi Arabia and Israel lose Trump’s unconditional support, while Iran sees some easing of sanctions, according to him. Low-probability events like a sharper-than-expected slide of the dollar leading to an upsurge in dollar inflation or austerity measures returning in Europe also make it to Kaletsky’s list.

Watch the full interview here:

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.