I have been inspired by recent thoughtful comments from Lawrence Summers and Paul Krugman, the economists, on the permanent liquidity trap, zero lower-bound constraint, global depression and endless expanse of frozen wasteland that stretches before us. It is time for another fun bubble. A commodities boom, one where everybody sells bonds and buys metals, grains and the “energy complex” with or without ever setting eyes on the stuff in warehouses, silos, or storage tanks.
This is not to dismiss the deflation that has set in on southern Europe, which may be a chronic condition for countries with declining working-age populations. Nor do I believe the US budget deal, or the regulators’ eliding of the Volcker rule, or the endless fixes for healthcare finance have solved any of our long-term structural problems. I said “commodities boom”, not “sustainable long-term global expansion” or “world peace”.
The commodities rally, boom, or whatever you want to call it has probably already started. It is accompanied by noticeably higher inflation risk premia that are being priced into government bond yields. Those do not support the view that the developed world as a whole is now at risk of falling into a deflationary spiral.