EVERYTHING IS GOING SWIMMINGLY: We’re Heading for a Stagflationary Crisis Unlike Anything We’ve Ever Seen.

First question: Will the rise in inflation in most advanced economies be temporary or more persistent? This debate has raged for the past year, but now it is largely settled: “Team Persistent” won, and “Team Transitory”—which included most central banks and fiscal authorities—has now admitted to having been mistaken.

The second question is whether the increase in inflation was driven more by bad policies (i.e., excessive aggregate demand because of excessively loose monetary, credit, and fiscal policies), or by bad luck (stagflationary negative aggregate supply shocks including the initial COVID-19 lockdowns, supply-chain bottlenecks, a reduced U.S. labor supply, the impact of Russia’s war in Ukraine on commodity prices, and China’s zero-COVID policy). While both demand and supply factors were in the mix, it is now widely recognized that supply factors have played an increasingly decisive role. This matters because supply-driven inflation is stagflationary and thus increases the risk of a hard landing (increased unemployment and potentially a recession) when monetary policy is tightened.

That leads directly to the third question: Will monetary-policy tightening by the U.S. Federal Reserve and other major central banks bring a hard landing (recession) or a soft landing (growth slowdown without a recession)? Until recently, most central banks and most of Wall Street were in “Team Soft Landing.” But the consensus has rapidly shifted, with even Fed Chair Jerome Powell recognizing that a recession is possible and that a soft landing will be “very challenging.”

We’ve spent nearly three years flooding the economy with funny money, while engaging in lockdowns and productivity- and innovation-crushing re-regulation — particularly in the vital energy and transportation sectors.

If that isn’t a recipe for stagflation, I don’t know what is.