Harvard Lecturer Speculates: Inflation Now, Deflation Later?

U.S. inflation hit a 13-year high in April, but global indicators point to deflation as a more likely scenario worldwide, according to a global trend-watcher.

Vikram Mansharamani is a lecturer at Harvard University and the author of Think For Yourself: Restoring Common Sense In An Age Of Experts and Artificial Intelligence and Boombustology: Spotting Financial Bubbles Before They Burst. He was the keynote speaker at today’s virtual LIMRA Retirement Industry Conference opening session.

The world feels chaotic right now, Mansharamani said, and he pointed to four transitions that help explain why we are where we are. Those transitions are:

1. A credit-fueled investment bubble burst and left a lot of capacity in its wake. That extra capacity is being felt on world markets.
2. We’re all able to do more with the same or fewer inputs. The result is more supply.
3. Because of shale and fracking, there is greater supply of fossil fuels. But there also is more more supply of alternative energy.
4. The world’s largest economies are aging and that equals less demand for goods. When people move from employment to a fixed income in retirement, they tend to spend less.

“All of that together  - more supply and less demand – points to deflation,” he said.  “There is inflation and there are pockets of it but the pressures I see on a global basis point toward a global deflationary pressure.”

What happens in a deflationary environment? Mansharamani listed four dynamics to watch for.

1. Currency wars
2. Inequality
3. Protectionism
4. Trade wars

“Ultimately, these dynamics lend themselves directly to the elephant in the room – the U.S.-China rivalry,” Mansharamani said. The four key elements of that rivalry, he said, are:

1. A technology war
2. A space race
3. A traditional military/arms race
4. An economic rivalry and currency war.

“This rivalry will have huge ramifications,” he said. “It will quite possibly become the most important issue facing all of us over the next decade or longer.”

One effect of current trends, he said, is that global supply chains will shift. The logic of “just in time” manufacturing is giving way to a more resilient philosophy of “just in case.”

“We are bringing supply chains home and regionalization is developing,” he said.

Global supply chains will shift. Because of these disruptions, supply chains are shifting. The logic of lowest cost just in time has given way to most resilient. Instead of justin time, it’s just in case. Bringing supply chains home. Regionalization is developing.

Eventually, the world economy will split into two global economies, Mansharamani said – a U.S.-based economy and a China-based economy. The bigger issue in this possible split, he said, is whether supply chains need to shift.

“This could be the world’s mechanism for redirecting itself,” he said.

Mansharamani pointed to the recent cyberattack on the Colonial Pipeline as demonstrating the pressures companies are facing to become resilient. “There’s a need to have a rapid reaction, quick identification and bring things back,” he said.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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