With the post-Covid price shocks, we may be starting to see that secular disinflation has started to turn and entering at least a cyclical inflationary period and maybe a secular one. One of the more prominent macro analysts to change their view, Russel Napier, thinks that the result of inflation with a larger debt load will be a cap on rates and capital controls so that the inflation can be used to slowly erode away the debt. QE may have been a precursor to this, but the BOJ’s explicit 25bp caps on 10Y JGBs and the quasi cap of ECB’s ESM program buying Italian BTPs are one step closer.
However, there are some reasons that “cap day” and capital controls may not be necessary for the USA:
- The caps from the BOJ and ECB make put a soft cap on US Treasuries as investors chose those bonds any time their yields look more attractive relative to Japanese or European bonds.
- The cheaper energy and food costs for the USA may mean they experience lower price inflation and so less upper pressure on bond yield in general, whereas Europe and Japan are net energy importers, so during inflation have been shown to show fiscal subsidies to the economy.
- The better demographics and presence of a large Millennial cohort may mean better economic growth.
- The relative outperformance of the US economy compared to Japan and Europe may attract more capital, removing the need for capital controls.
There is still much to be gained from Russell Napier’s insights, which can be found in the talk below: