Economist Michael Woodward writes:
In the 20th century, the average inflation rate among G7 economies was 5%. In the first two decades of this century, it was 2%. The interlude of very low rates, inflation, and growth may have been caused by factors that seem to be reversing: rapid globalization, low public debt, asset-light technology, and optimal demographics. If these reversals create conditions that are more similar to the 20th century than the 21st, it could mean a wider range of possible market outcomes than investors expect.A return to a 5% 'normal' would imply at least that. Tack on a 200 bps premium for mortgages and you have people borrowing at 9%.
What scares me is that globalization is objectively deflationary, demographics have undoubtedly been a sweet spot and technology made leaps in that period. We won't repeat that and may even be unwinding it via the trade war.
Perhaps AI and automation can spark a repeat -- or even an extension of that trend -- but that raises fresh set of questions.
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