Stagflation for the Ages

By Stephen S. Roach – Project Syndicate

The supply-chain disruptions during the pandemic look almost quaint compared to the fundamental reordering of global trade currently underway. This fracturing, when coupled with US President Donald Trump’s attacks on central-bank independence and preference for a weaker dollar, threatens a prolonged period of stagflation.

At a minimum, Trump is ramping up political pressure on US monetary policy precisely when inflationary pressures are mounting in the face of new supply-chain disruptions. Add to the mix Trump’s well-known preference for a weaker US dollar, and the current circumstances bear a striking resemblance to those of the late 1970s, when a weak dollar and a weak Fed compounded America’s first outbreak of stagflation. Remember the clueless G. William Miller, who was Fed chair at the time? That is a painful part of my own experience as a Fed staffer that I would rather forget.

The other side of the stagflationary coin is the increasing risk of US and global recession. Again, this goes back to the growing possibility of a pervasive, long-lasting uncertainty shock bearing down on the US and global economies, and the associated paralysis of business and consumer decision-making. Trump celebrated the imposition of so-called “reciprocal” tariffs on April 2 as “Liberation Day.” To me, it was more like an act of sabotage, triggering retaliation and a likely decline in the global trade cycle. If this continues, it will be exceedingly difficult for the world to sidestep recession.