Normalisation rhapsody... or inflation tragedy?

June 30, 2022

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Monthly House View - July 2022 - Download here

"Any act requires oblivion"

Excerpts from Nietzsche

Victory is never a home run in real life, nor is it a quick return to normalcy. After having defeated his enemies, it took Ulysses ten years to leave the ruins of Troy and return to his home island of Ithaca. Exactly the time that it took to win the decade-long fight against inflation in the 70s. It also took the same amount of time for central banks to revive inflation expectations; and now that they are here, we only wish they return to where they were before. Is this realistic? What if we were not just in a cyclical moment, but in a more structural shift that could take years to curb?

The ancient Greeks had a sense of temporality and a form of patience that we may have lost. This is probably the reason why forgetfulness - the dual condition for action and happiness for Nietzsche - and our short memory have led us to forget the long dynamic of inflationary cycles. The memory of past time knocks unsuccessfully on the door of our perceptions biased by our hopes, our optimism, our beliefs as well as by our shortened temporal horizon. Our hopes for perpetual peace have made us forget the long history of Russia. Financial market volatility also contributes to reducing our time horizon, while social urgencies and free elections shorten the horizon of governments. These social demands call for rapid action by central banks today. However, this may well be a trap; inflationary cycles take more time to cool than to revive.

The shortened time horizon and perception bias of central banks is one of the explanations behind this major policy error. In 2021, central bankers were still so shaken by the dislocation that followed the pandemic and doubtful on the job market recovery that they continued to provide unjustified monetary accommodation. They recently refused to acknowledge the return of inflation when it was already here, biased by a decade of deflation fears.

Now that inflation is here, central banks are rushing to raise rates and are trying to close their eyes to the aftermath of a sharp normalisation process in an already slowing economy, thereby increasing the risk of recession, with many geopolitical unknowns. The normalisation of policy mix is not a destination, but a journey, with more ups and downs than usual, and many possible surprises along the way. What if this was not a short and happy-ending rhapsody, but a darker and longer Greek tragedy with heroes in the grip of a fate that eludes them and subject to Cornelian choices?

That is the key question asked today by investors to the Fed. Are you confident that these actions can be efficient in controlling a surprisingly strong inflationary path? Are you ready to run the risk of a recession to curb inflationary pressures?

Reading Greek tragedies is useful nowadays to rethink our perception of time and the impact of human and political actions. Contrary to our modern conception of history - viewed as a dialectic path of progress - tragedies teach us that things do not always end well, and that our sometimes vain actions can make things worse. A lesson in humility for us investors. If we cannot predict the future, it is better to adapt to the present, without forgetting history.

 

Important information

Monthly House View, 23/06/2022 release - Excerpt of the Editorial

June 30, 2022

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