The new era of mid-high, persistent global inflation

QUANTITATIVE easing (QE) amid Covid-19 has resulted in extreme benefits and costs to the global economy. It enabled the global stock market to rebound from the collapse in March 2020. In particular, QE stopped plunges in stock markets from triggering vicious cycles and then a full-blown global financial crisis: Without QE, highly-leveraged commodity futures markets, gold and other metals markets, corporate and government bond markets, and other derivative markets would collapse further after the initial plunge, which will in turn trigger a widespread financial crisis, a collapse in consumption and investment, and then a great recession.

QE also allowed governments to provide financial support to citizens, relieving them from economic distress, and preventing related social disorder. It also chopped up the subsequent negative multiplier effect and other vicious cycles, hence pre-empting a great depression similar to that of the 1930s.

However, from post-QE experiences in 2008-17, we believe that Western governments would, once again, lack the ability and political will required to mop up the enormous excess liquidity generated by QE. As discussed in our previous publications, excess liquidity would first cause severe global asset inflation through carry trade and capital flows into economies without QE. After some time, excess liquidity and asset inflation would push both the US and global economy into a mid-high inflation era.