“A shift of power that cannot be underestimated”
Russell Napier is one of the many commentators we follow and have highlighted in these pages. He may not be featured as often as Mohamed El-Erian, with the same amusement as Larry Summers, or with the mockery befitting Mr. Kashkari, but when he gives an interview, we tend to sit up and pay attention. (See his comments in both 2020 and 2021). This week, we want to dive into his latest interview with The Market. For those with a few minutes, reading the article in full is well worth the time.
Among the various topics, Mr. Napier covers the “new normal” of economies where the “allocation of resources is not left to markets anymore”. No soup for you! (Of course, things like semiconductors are too important to be left to the vagaries of the market, but it’s still a bit jarring for those of us who remember the US as the home of the “invisible hand”). Napier also explains that debt to GDP levels “have simply grown too high” for economies to “stand normal, necessary recessions”. However, one of the potentially more controversial ideas that Mr. Napier addresses is that of central bank impotence. This may sound like a bit of a stretch given the number of headlines today about the ECB’s latest move (75bps hike) and the ink we’ve spilt covering central banks (here and here), but Napier isn’t alone, with the likes of Warren Mosler sharing similar views. In short, Napier explains that having tasted the ability to control the creation of money, courtesy of what was explained to be “only a temporary emergency measure to combat the effects of the pandemic”, now “governments won’t retreat from these policies”. Consequently, Napier expects policymakers to engineer “nominal GDP growth through a higher structural level of inflation”. This leads to “a disconnect between the hawkish rhetorics of central banks and the actions of governments”. As an example, Napier cites the German scheme to protect households that we discussed here, noting that this is “creating a fiscal stimulus at the same time as the ECB is trying to rein in their monetary policy”. (As an aside, this isn’t without consequences in bond markets. As this article from Reuters notes, “Recent weak [German bond] auctions have demonstrated the challenges of issuing debt in markets racked with uncertainty about interest rates and state spending”.) Ultimately, though, Napier believes governments will win (perhaps not without a fight, if Ex-Fed Kocherlakota’s account of the Truss debacle is to be believed), leading to “a boom in capital investment and high growth in nominal GDP”, but with the added caveat that it will mean “inflation won’t come down to pre-2020 levels but will settle between 4 and 6%”. (Lines up well with Larry’s latest!)
