Is Stagflation Coming?

Lost in the debate over whether today's ultra-loose fiscal and monetary policies will trigger painful inflation is the broader risk posed by potential negative supply shocks. From trade wars and de-globalization to aging populations and populist politics, there is no shortage of inflationary threats on the horizon.

Nouriel Roubini

NEW YORK – There is a growing debate about whether the inflation that will arise over the next few months will be temporary, reflecting the sharp bounce-back from the COVID-19 recession, or persistent, reflecting both demand-pull and cost-push factors.

Several arguments point to a persistent secular increase in inflation, which has remained below most central banks’ annual 2% target for over a decade. 

The first holds that the United States has enacted excessive fiscal stimulus for an economy that already appears to be recovering faster than expected. 

The additional $1.9 trillion of spending approved in March came on top of a $3 trillion package last spring and a $900 billion stimulus in December, and a $2 trillion infrastructure bill will soon follow. 

The US response to the crisis is thus an order of magnitude larger than its response to the 2008 global financial crisis.

The counter-argument is that this stimulus will not trigger lasting inflation, because households will save a large fraction of it to pay down debts. 

Moreover, investments in infrastructure will increase not just demand but also supply, by expanding the stock of productivity-enhancing public capital. 

But, of course, even accounting for these dynamics, the bulge of private savings brought by the stimulus implies that there will be some inflationary release of pent-up demand.

A second, related argument is that the US Federal Reserve and other major central banks are being excessively accommodative with policies that combine monetary and credit easing. 

The liquidity provided by central banks has already led to asset inflation in the short run, and will drive inflationary credit growth and real spending as economic re-opening and recovery accelerate. 

Some will argue that when the time comes, central banks can simply mop up the excess liquidity by drawing down their balance sheets and raising policy rates from zero or negative levels. But this claim has become increasingly hard to swallow.

Centrals banks have been monetizing large fiscal deficits in what amounts to “helicopter money” or an application of Modern Monetary Theory. 

At a time when public and private debt is growing from an already high baseline (425% of GDP in advanced economies and 356% globally), only a combination of low short- and long-term interest rates can keep debt burdens sustainable. 

Monetary-policy normalization at this point would crash bond and credit markets, and then stock markets, inciting a recession. Central banks have effectively lost their independence.

Here, the counter-argument is that when economies reach full capacity and full employment, central banks will do whatever it takes to maintain their credibility and independence. 

The alternative would be a de-anchoring of inflation expectations that would destroy their reputations and allow for runaway price growth.

A third claim is that the monetization of fiscal deficits will not be inflationary; rather, it will merely prevent deflation. 

However, this assumes that the shock hitting the global economy resembles the one in 2008, when the collapse of an asset bubble created a credit crunch and thus an aggregate demand shock.

The problem today is that we are recovering from a negative aggregate supply shock. 

As such, overly loose monetary and fiscal policies could indeed lead to inflation or, worse, stagflation (high inflation alongside a recession). 

After all, the stagflation of the 1970s came after two negative oil-supply shocks following the 1973 Yom Kippur War and the 1979 Iranian Revolution.

In today’s context, we will need to worry about a number of potential negative supply shocks, both as threats to potential growth and as possible factors driving up production costs. 

These include trade hurdles such as de-globalization and rising protectionism; post-pandemic supply bottlenecks; the deepening Sino-American cold war; and the ensuing balkanization of global supply chains and reshoring of foreign direct investment from low-cost China to higher-cost locations.

Equally worrying is the demographic structure in both advanced and emerging economies. 

Just when elderly cohorts are boosting consumption by spending down their savings, new restrictions on migration will be putting upward pressure on labor costs.

Moreover, rising income and wealth inequalities mean that the threat of a populist backlash will remain in play. 

On one hand, this could take the form of fiscal and regulatory policies to support workers and unions – a further source of pressure on labor costs. 

On the other hand, the concentration of oligopolistic power in the corporate sector also could prove inflationary, because it boosts producers’ pricing power. 

And, of course, the backlash against Big Tech and capital-intensive, labor-saving technology could reduce innovation more broadly.

There is a counter-narrative to this stagflationary thesis. 

Despite the public backlash, technological innovation in artificial intelligence, machine learning, and robotics could continue to weaken labor, and demographic effects could be offset by higher retirement ages (implying a larger labor supply).

Similarly, today’s reversal of globalization may itself be reversed as regional integration deepens in many parts of the world, and as the outsourcing of services provides workarounds for obstacles to labor migration (a programmer in India doesn’t have to move to Silicon Valley to design a US app). 

Finally, any reductions in income inequality may simply militate against tepid demand and deflationary secular stagnation, rather than being severely inflationary.

In the short run, the slack in markets for goods, labor, and commodities, and in some real-estate markets, will prevent a sustained inflationary surge. 

But over the next few years, loose monetary and fiscal policies will start to trigger persistent inflationary – and eventually stagflationary – pressure, owing to the emergence of any number of persistent negative supply shocks.

Make no mistake: inflation’s return would have severe economic and financial consequences. 

We would have gone from the “Great Moderation” to a new period of macro instability. 

The secular bull market in bonds would finally end, and rising nominal and real bond yields would make today’s debts unsustainable, crashing global equity markets. In due time, we could even witness the return of 1970s-style malaise.

Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is, and he is the host of

On the Nile Dam, Egypt Plays a Weak Hand

The country has few options to end the stalemate over the Grand Ethiopian Renaissance Dam.

By: Hilal Khashan

The Grand Ethiopian Renaissance Dam has been billed as a transformational project for Ethiopia, where currently some 60 percent of the population does not have access to electricity. 

Ethiopians across the political spectrum overwhelmingly support its construction, which is expected to generate about 6,500 megawatts of hydropower. (Some will be exported to neighboring countries.) 

Last July, when the first filling phase was completed, loading 4.9 billion cubic meters of water into the dam’s reservoir, Prime Minister Abiy Ahmed called it a “turning point” in Ethiopia’s development. 

The second filling phase, totaling 13.5 billion cubic meters of water, is expected to begin this July.

But not everyone is as enthusiastic. Egypt, as a downstream country that relies on the Nile for fresh water, believes the project will put its supplies in jeopardy. Water-sharing agreements reached in 1929 and 1956 gave Egypt the right to a lion’s share of the Nile’s water resources, but the GERD threatens to revise these deals. 

Egypt’s insistence on its historical rights to the river has angered Ethiopia as well as other African nations that support the dam’s construction. Egypt is thus in a predicament: Addis Ababa is determined to proceed, and Cairo is left with very few options.

Ethiopia’s Resolve

Since 2011, when Ethiopia laid the groundwork for the GERD, it has regularly engaged in talks with Egypt and Sudan, another downstream country, to resolve the dispute over water rights. 

But Egypt has accused Ethiopia of not negotiating in good faith, believing the Ethiopians are trying to draw out the talks as long as possible rather than reach an agreement. 

Last month’s negotiations in Kinshasa failed, just like last year’s talks in Washington, because Ethiopia refused to commit to a binding agreement over filling time and subsequent water release into the Nile. 

Ethiopia is interested only in a deal on general principles, one that doesn’t require it to make concessions or give guarantees. 

It has rejected outright Egypt’s claim to 55 billion cubic meters of water annually because it would affect its own supplies during periods of drought, which could last up to 18 months. (Likewise, Egypt’s main concern over the dam is how it will affect supplies during extended periods of drought.)


Ethiopia has offered only to inform Egypt and Sudan about the filling process that will begin in July through operators designated by the two countries. 

The Egyptians and Sudanese see this as an attempt to buy time and impose new realities on the ground, since the Ethiopian proposal doesn’t specify what information the government in Addis Ababa is willing to share. 

But Addis Ababa has little incentive to concede much more; the Biden administration has already released $272 million in aid to Ethiopia that had been frozen under former President Donald Trump because it refused to sign a U.S.-sponsored water agreement with Egypt. 

The delinking of financial aid to the GERD negotiations assured Addis Ababa that the U.S. would not authorize an Egyptian military strike against the dam. U.S. National Security Adviser Jake Sullivan has also expressed the United States’ willingness to help resolve the dispute.

But Ethiopia is keen on keeping the U.S., European Union and United Nations out of the talks, preferring instead to have only the African Union mediate. Addis Ababa believes other sub-Saharan African countries will empathize with its cause and tacitly relate to its perception of Egypt as a colonial power.

The Military Option

Egypt has repeatedly threatened to use force to defend its rights to the Nile. In 1978, Egyptian President Anwar Sadat said that the only issue that could drive Egypt to war was water. 

And earlier this month, President Abdel Fattah el-Sissi warned that blocking Egypt’s access to the Nile would lead to “inconceivable instability in the region that no one could imagine.” 

Over the past few weeks, Egypt has signed military cooperation agreements with three Nile River riparian states: Sudan, Uganda and Burundi. 

The Egyptian air force is theoretically capable of striking the GERD, now that the U.S. has lifted its veto on France’s sale of SCALP-EG cruise missiles. 

The Rafale jets delivering the missiles would need escort fighter jets, ideally the SU-35 jets, of which Egypt has received five. 

However, the Egyptian air force may have trouble integrating them into its arsenal because they are challenging to fly. 

Moreover, despite the size of the Egyptian air force, most of its fleet is obsolescent. It has very few jets capable of executing such a complex operation.

Egypt would need Sudan’s support to target the GERD, but the Sudanese aren’t interested in going to war. Egypt and Sudan held two joint air drills simulating an attack on enemy targets, but an assault on the GERD is unlikely. 

Officials from both countries have said all options are on the table to resolve the dispute, but for Sudan, this means going to the U.N. Security Council as a last resort. 

Sudan’s foreign minister has already ruled out a military solution to the stalemate, saying that all diplomatic options need to be exhausted.

Egypt’s Weak Hand

Access to Nile water resources has been a preoccupation for many Egyptian leaders. In the 1950s, Gamal Abdel Nasser repeatedly invited Ethiopian Emperor Haile Selassie to visit Cairo, but the invitations were declined. 

Nasser even entertained the idea of uniting the Nile Valley countries, an idea Ethiopia adamantly rejected. Failing to sway Haile Selassie to cooperate, Nasser sought to destabilize Ethiopia, as he did to Sudan after it unilaterally declared independence from Britain and Egypt in 1956.

Former President Hosni Mubarak weakened Egypt’s hand by cutting diplomatic ties with Ethiopia after an attempt on his life was made in 1995 while he was in Addis Ababa for an African summit. 

He isolated Egypt from Ethiopia and most of Africa, suspending the Egyptian Ethiopian Business Council’s activities for 17 years. Mubarak’s shortsightedness allowed Ethiopia to launch its gigantic project without having to worry about Egypt’s approval. 

Egypt also suspended its membership in the Nile Basin Initiative in 2010 after six riparian states signed the Entebbe Agreement, which reduced Egypt’s and Sudan’s shares of water resources from the Nile.

More recently, El-Sissi’s detractors have accused him of weakening Egypt’s negotiating position by signing the controversial 2015 Declaration of Principles, which offered compensation to downstream countries for the construction of the GERD. 

By signing the deal, Egypt effectively recognized Ethiopia’s right to fill the dam’s reservoir and impaired its own right to object. 

Egypt’s foreign minister even asked his Russian counterpart to step in and dissuade Ethiopia from making unilateral decisions that could affect Egypt’s water supplies, despite knowing that Addis Ababa is opposed to foreign mediation.

El-Sissi has blamed the water crisis on the 2011 uprising that toppled Mubarak’s regime. 

He has argued, rather unconvincingly, that Ethiopia would not have constructed the GERD had the uprising not occurred. 

But the truth is that plans for the dam date back to 2001. In fact, Egypt was already considering the consequences of the dam’s construction in 2009, when it formed a committee to assess the situation that included representatives from the ministries of defense, foreign affairs, interior, water resources and electricity.

Construction of the GERD has reached a point of no return. And as a downstream country, Egypt has no option but to keep communication lines open. 

Whereas Ethiopian leaders from Haile Selassie to Abiy Ahmed have shown resolve in managing their country’s water resources, Egyptian leaders from Nasser to el-Sissi have failed to protect theirs.

Gold Is Going Higher


Excerpt from Lawrence Lepard’s Equity Management Associates Q1 Report: 

We believe we are in the early to middle stages of a worldwide sovereign debt bubble collapse. 

The “bubble” which exists today is in debt and the currencies which are backed and supported by this debt.

This is a very big deal and does not happen very often. In fact, no one alive today has ever seen a sovereign debt collapse of a large country.

You need to consult the history books to find one, with the last ones occurring in the 1900’s to 1930’s. 

Because of this, the average investor today is not prepared for what is coming. 

We believe that our Fund offers a realistic and well-priced form of protection against this type of crisis. 

We offer “monetary debasement” insurance.

Historically, these crises occur when sovereign debt exceeds 100% of GDP as identified by Reinhart and Rogoff in their book This Time is Different: Eight Centuries of Financial Folly. 

Presently, the on-balance sheet US Federal Debt ($28.1 Trillion) is 130% of GDP ($21.6T). 

Off-balance sheet liabilities (Social Security, Medicare/Medicaid) add another $100 to $200T depending upon assumptions.

This debt level could not be serviced (much less reduced or paid off) if interest rates, which are the price of money, were set by a free market. 

In this respect, the monetary authorities worldwide, through price-fixing of interest rates, have broken the financial markets. 

History proves that price-fixing does not work (see USSR and grain prices). 

The price of money is the most important price in capitalism and messing with it distorts the price of everything. 

Capital is not allocated efficiently. 

With over-indebtedness as a backdrop, history shows us that there are only three ways for a country to deal with a situation like this.

1. Default. Debts collapse to worthlessness as entities fail. Which leads to Deflation.

2. Restructure/Revalue against some superior form of money. Reset. (see Roosevelt 1934).

3. Inflate the currency and GDP versus the Debt. (see US Post WWII).

Option 1 is possible, and perhaps in due course, option 2 could be chosen. 

However, in our current political structure, we believe the most likely path the US will take is option 3 (Inflation). 

Therefore, we believe inflation is in our future. 

Not just a little bit of inflation, a lot of inflation!

When an economy becomes too debt-saturated things begin to break, and the government generally intervenes to prevent the natural deflationary cleansing that would occur without intervention. 

The government intervened in 2008 during the GFC. 

In March 2020 when the economy ground to a halt (COVID was the match, but the fire had been built), the government again stepped in (with an unprecedented order of magnitude) to prevent a severe deflation and economic collapse.

Historically, the Money Supply has never grown like this (past 60 years view):

Inflation Clearly Emerges

In our last letter, we talked about the balance between inflation and deflation. 

We are now of the opinion that higher inflation is an absolute lock. 

We believe we are in a clear case of a “crack up boom”. 

The prices of everything are going up sharply.

For example, nationwide median house prices are up 10% in January and 15.8% in February year on year. 

This has never happened before, even during the housing bubble of 2007-2008. 

But the most worrisome form of inflation is food inflation. 

This is what leads to revolutions.

As for gold…

All of these spending plans require borrowing. 

Someone has to purchase that debt and the trends on that front do not look good. 

In this low rate world, the buyer of last resort is the Fed, and they will have to keep purchasing bonds or interest rates will spike higher. 

Our view is that they are in a doom loop and they can never stop. 

The only unknown is how long it takes for all of our fellow citizens and the financial markets to figure this out.

While it is impossible to say there is a direct link between US Government deficits and the price of gold, it is interesting to notice the correlation between the two since 2012. (we know correlation is not causation).

From this chart, and with deficits growing wider each year, we infer that there is a very high likelihood that the price of gold will rise in the next few years.