The debate about inflation in the United States continues to rage. The argument over “transitory” inflation and what that means versus a strategic accelerating upward trend in the price level defines the outcomes we see among various forecasts. But the only thing we know about making forecasts, when we make them, is that they are going to be wrong to one degree or another. The whole idea is to arrange the assumptions, articulate them clearly, specify the rationale behind an opinion (which is what forecasting constitutes), be prepared to admit error and timing differences, and alter our views.
A Dialogue that reveals the rationales behind various forecasts is critical. The College of Central Bankers (CCB) of the Global Interdependence Center (GIC) has taken this mission to a new level. Now available to the general public (not just GIC members and round-table participants and sponsors) is a profoundly stimulating discussion about central bank policy and inflation. Here’s the link: “Will Inflation Force the Slowing or Reversal of Central Banks’ ‘Easy’ Monetary Policy and Increase Risks of Economic Downturns?” https://www.interdependence.org/resources/will-inflation-force-the-slowing-or-reversal-of-central-banks-easy-monetary-policy-and-increase-risks-of-economic-downturns/.
The Global Interdependence Center is uniquely positioned as an independent and neutral body. One of its appealing characteristics is that it can assemble diverse views, civilly discuss them, and articulate the rationale behind each. GIC prides itself on a half century of playing a role as a neutral convener of dialogue.
GIC Vice Chair Peter Gold, a driving force in the creation of the College of Central Bankers, has assembled retired central bankers from around the world and a growing advisory board of those who have participated in discussions with central bankers but did not hold the specific position themselves. It is a pleasure for Cumberland Advisors to be a sponsor of the Global Interdependence Center and to support the development of the College of Central Bankers, with effort, time, money, and inputs as requested by the GIC leadership. It’s a pleasure for me, and an honor, to be one of the members of the CCB advisory board.
We recommend that our readers and others spend an hour listening to the discussion linked above. Four speakers are featured in this briefing. Peter Gold introduces the conversation and serves as a participating moderator (he articulates a few minutes of his own views here). The panel is Jeremy J. Siegel, Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania; Athanasios Orphanides, Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management; and William Poole, Ph.D., Distinguished Senior Scholar at the Mises Institute. Let me say a little about each of them.
Nearly everyone in the financial market, economic, professional, and educational scene knows longtime Philadelphia Wharton professor Jeremy Siegel from his books, his media, his discussions, and his long and distinguished history of astute observations about markets, finance, and central banking.
Athanasios Orphanides is a distinguished scholar in central banking, a theoretician whose extensive credentials include his service on the Governing Council of the European Central Bank, as well as activities with the Federal Reserve.
Long-time friend Bill Poole, a former President of the Federal Reserve Bank of St. Louis, has long been an important voice, strongly articulating his views with supportive arguments in the area of monetary policy and central banking across his distinguished and extensive career.
Imagine this panel discussing the issue of inflation from their various points of view. Well, you don’t have to imagine. You can hear the briefing and see the slides; and, when you are finished, you will be able to better articulate the arguments on all sides of the “transitory or not” inflation discussion. You will be thinking more deeply about this question than you might be before you spend the hour So, dear readers, we recommend taking the time.
A personal note: It has been my honor and privilege to have personal discussions with the participants of the panel. They are civil with each other. They do not engage in the political divisions that so profoundly debilitate dialogue in the United States and elsewhere. They are consummate professionals dedicated to public service, and they distinguish their views based on data and history.
For me personally and as a money manager, the panel is instructive and helpful. Having listened, I speculate as to whether Orphanides may be right, and J. Powell may be doing the right thing with a persistent policy of a near-zero interest rate, because the option of a negative interest rate is not available to him and the damage from a negative interest rate is visible in the European theater. On the other hand, Bill Poole discusses why he thinks a rising inflation framework lies ahead, while admitting that he has felt this way for a decade during which inflation did not materialize. Bill Poole is an honorable theoretician and monetary policy practitioner. Jeremy Siegel gives viewers data and history to chew on, lots of it. Their takes vary, and that is useful.
At the end of this presentation and all of our research, we conclude that we still don’t know the longer-term trajectory of inflation. At Cumberland, we need to be risk managers, so we prepare for rising interest rates and rising inflation as a persistent trend because that’s the defensive posture you take with portfolio management risk. Therefore, bond accounts at Cumberland are in a barbell structure. We’ve discussed barbells many times in various writings and in videos we've produced at Cumberland and elsewhere. Here is one example: https://www.cumber.com/market-commentary/feds-path-also-why-barbell-not-ladder.
That said, we don’t know that rising inflation will persist, so we have to be prepared to change, and we have to closely follow high-frequency data shifts, of which there are many. We do that every day.
The other dynamic not mentioned in this discussion of monetary policy, monetary aggregates, interest rates, and the restrictions and restraints that apply with the zero lower bound of interest rates is the fact that we are in a pandemic shock period.
What history shows is that pandemic shock periods alter traditional policies. They are not business-as-usual business cycles. They are something else. They are big. They alter the landscape in a meaningful and serious way.
Therefore we have to take the views articulated by Siegel and Orphanides and Poole and others out of the conceptual framework of the traditional business cycle and set them into the conceptual framework of a shock-response discussion. We do not have a lot of modern history to work from. The most recent instance would be the 1957–58 Asian flu pandemic, and prior to that one we would have to go back to the 1917, ’18, ’19, ’20, ’21 Spanish flu pandemic. Readers, please notice that I cited five years, one after another, not just one. We aren’t going to call it the 1918 pandemic, because it spanned five long years.
What is apparent from history, however, is that pandemics tend to be followed by recessions, and pandemics tend to be followed by a decline in real interest rates, and pandemics claim people, not the capital stock. When you have a natural disaster and a building is destroyed by a hurricane, earthquake, fire, or flood, you start a process of rebuilding the building. But when you have a pandemic and people are dead, the building still stands. You don’t have to rebuild it.
It takes a long stretch of time to make a change when the pandemic means people are no longer here or no longer able to work. That is the unspoken piece which gnaws at central bankers worldwide, including our Federal Reserve, and which is not discussed in this one-hour extraordinary assemblage of professional, skilled views.
I thank the Global Interdependence Center, of which I have been a part for an extensive period of my life, for developing the College of Central Bankers, which brings together wonderful experience, great minds, and provocative thought from around the world. We anticipate that the CCB has profound contributions to make, both now and going forward. We hope readers enjoy the briefing. Here, again, is the link: https://www.interdependence.org/resources/will-inflation-force-the-slowing-or-reversal-of-central-banks-easy-monetary-policy-and-increase-risks-of-economic-downturns/. At the GIC website, readers can sign up to receive event updates and to participate in future round tables, briefings, and other GIC events.
Meanwhile, dear readers, the pandemic isn’t over. Anybody who follows the news flow sees that. Delta is serious. Please be safe.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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