Listen: The Essential Podcast, Episode 86: Talking About Inflation with Stephen D King

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Nathan Hunt: This is the Essential Podcast from S&P Global. My name is Nathan Hunt. Inflation was dead. So we were informed. Central bankers had slayed the beast. Paul Volcker had stared down the runaway inflation of the 1970s and inflation had blinked first. We lived in an age of great moderation, high growth and moderate inflation and all was well in the land.

In late 2021, there were rumblings. Inflation started ticking up above targets. But the central bankers were unconcerned. It was transitory you understand, nothing to see here. A mere blip brought on by pent-up demand, not everyone agreed, a few lonely voices called out in the wilderness, they were wrong, of course, absurdly wrong misguided until that is they were proved right. Almost two years later, transitory inflation is still with us.

My guess today was one of those lonely voices and the wilderness. Stephen D King, he is a senior economic adviser at HSBC Holdings and the author of multiple books. He joins the podcast today to talk about his new book, We Need to Talk About Inflation, 14 Urgent Lessons from the Last 2,000 years.

Well, it would certainly be understandable if the book was just a lengthy exercise in I told you so. The book is actually a fascinating and erudite look at inflation through the years and how it will continue to affect us in the future. Stephen, welcome to the podcast.

Stephen King: Well Nathan, it's great to be with you. And thanks for such a lovely introduction.

Nathan Hunt: Let's begin with the obvious question. Do we need to talk about inflation. Isn't it just going away, again, thanks to the heroic efforts of central bankers?

Stephen King: If only they were true, I think that there's been a quite a terrible shock really for central bankers themselves over the last couple of years that as you quite rightly said, all the talk originally was about inflation being transitory or be here today gone tomorrow, and there's nothing really to worry about.

But I think the lesson really since, I suppose, the pandemic is what starts off as being an inflation story in certain very specific categories like, for example, semiconductors and the impact of semiconductor shortages on secondhand car prices and so on, it slowly evolves, it shifts towards price increases for a wider range of goods and then services too, and then you start to see pressures coming through in labor markets, too.

So in other words, there's a wage response to the increase in prices. Now to be fair, some central banks have been perhaps a little quicker than others to recognize all this. And I think if one's being fair to the Federal Reserve, J. Powell was the person who abolished the use of the word transit rate. And the Fed has raised interest rates in response to this increase in inflationary pressure more than some others.

If you're suggesting the kind of league table of performance in response to this higher inflation, the Fed is probably somewhere near the top, but the European Central Bank and the Bank of England, I think, have been struggling. And even just the last few days, the Bank of England has finally been forced to admit that it's economic models don't work, which is quite the admission really for a central bank that claimed it was fully credible and nothing could possibly go wrong.

Nathan Hunt: Stephen, you were on a short list, a very short list of, well, let's say, the voices in the wilderness, who insisted in early 2022 that inflation was not transitory. What did you see at the time that it led you to believe that inflation was, let's call it back. Why don't you think more people saw the dangers at the time?

Stephen King: So the first thing is that there was a very strange inflationary response to what was a terrible collapse in economic activity in 2020. When you look at the falls in economic activity in that year in the first year of the pandemic, these falls, of course, were triggered by lockdowns.

But nevertheless, the declines were as big as we've seen during The Great Depression in the 1930s. And one of the things that every economist knows about The Great Depression in 1930s, was that it was inherently deflationary, that prices fell, wages fell, unemployment soared, mass bankruptcies, mass bank failures, all these things you associate with The Great Depression.

And I think there was an inclination on behalf of some of the central banks themselves to think, well, if it's the same decline in economic activity in 2020 as was the case in the 1930s, then maybe we're facing the same kind of deflationary problems. But very, very early in 2021, actually, you started to see upsize surprises coming through in inflation, first of all, in the U.S., but then very, very shortly thereafter in both Europe and in the U.K.

Now at first, a lot of American Economists said, this is just the result of the Biden fiscal stimulus and that will fade over a period of time. What was more difficult to explain in my view was how the Biden fiscal stimulus was leading to upsize of price inflation in the Eurozone in the U.K., that connection wasn't quite so obvious.

The second thing I had observe is that Central Banks have got out of the habit of looking at money supply as an indicator of where inflationary pressures might be. And to be fair, the relationship between money supply and the broader economy and inflation, it's not that secure from year to year.

But the increases we saw in money supply in 2020 was spectacular. I mean they were absolutely enormous. You had central banks prepared to be printing money, knowing in fact, that people were not able to spend that money because of lockdowns. So the money is invested in financial assets.

The financial assets rise strongly on value, which is another way of saying that when lockdowns came to an end, and a lot of people were in a very, very strong position to spend very, very aggressively, they've been locked down for a while. They now wanted to enjoy themselves, and they were happy to spend. But at the same time, if you think about the scarring from the pandemic, the scarring was probably more on what I describe as the supply side rather than the demand side.

So these are people going for early retirements, the labor supply is smaller than it was. Fewer people traveling across borders that might have been the case in the past. Certainly, fewer people traveling around the U.S. than was the case previously in search of jobs.

And at the same time, you had China failing to come back on stream as quickly as other countries. So for a whole host of reasons, what you have was a story of a lot of demand coming out, but at the same time, not much in the way of supply. And any economist will tell you that you've got strong demand and not much in the way of supply, you're likely to end up with a bit of an inflationary problem.

So they were my initial thoughts really as to why we've got this difficulty. But then the second bunch of questions really about why it was the policymakers themselves didn't recognize these issues. And if I have to put this very, very simply, I think the policymakers got caught up with their own deflationary or disinflationary propaganda.

They thought they were still fighting a battle, that they've been fighting particularly since the end of the global financial crisis, which is a battle against falling prices. And it was almost as that they couldn't imagine a world where we could suddenly tilt from falling prices to rising prices. So when prices did rise, there was a strong desire to dismiss this evidence as not being terribly important until, frankly, it was too late.

Nathan Hunt: Stephen, I don't want to get you in trouble. Although it would be probably good for my listenership numbers, if you were to say something hugely controversial. But I know that the world of professional economists is not vast and that you certainly are familiar with all of the people who were setting the policies as we were dealing with this.

So I want to talk at a level of abstraction here. Monetary and fiscal policy, how separate are these? I'd be interested in your thoughts on the level of broad coordination but also perhaps on the individual level, it seems like there's a lot of movement from fiscal bodies to monetary bodies and vice versa or people. How does this actually play out?

Stephen King: Okay. So in the sort of the model that most people think about these days, you have an independent central bank, which is in charge of monetary policy whether you have a finance ministry in the case of the U.S., it's the treasury department, which is responsible for setting taxes and levels of public spending on the amount that the government borrows. And the sort of conventional wisdom that's emerged over the last few decades is the idea that the fiscal authority, the financial authority sets its budget.

And whatever the budget is on whatever impact it has on the economy, the Central Bank then responds to that and says, well, actually, this is a bit of inflation a bit deflation, so we tweak interest rates either higher or lower in response to their judgment as to what the macro economic implications might be of the budget itself.

So far, so good. And the reason why you structured it in that way is that politicians themselves realize they couldn't trust themselves to control the inflation. Every single time they want to do with the election, they were sort of basically try to engineer some kind of boom, which was great before the election, but then after the election was out of the way, the boom would turn to a bust.

And typically, the boom was associated with inflation and the bust was associated with squeezing inflation back out of the system. So the idea was we're going to depoliticize the monetary policy decisions to make sure that we look through the next election, and we are sort of on this straight narrow path, and we can't deviate for political reasons. That's the sort of the theory.

The practice, it's not quite the same. First of all, as you quite rightly say, there's a sort of two-way traffic between finance ministries and central banks that the personnel in one often end up being the personnel in the other or vice versa. So the obvious example in the U.S. is Janet Yellen, who is now the Treasury Secretary, but previously was the Chair of the Fed.

In the case of the U.K., appointments to the Bank of England's Monetary Policy Committee, which is the interest rate setting committee of the Bank of England are made primarily by Her Majesty's Treasury, which is the finance ministry. So although the bank has what's described as operational independence, the personnel at the bank are selected by the effectively the finance ministry.

So that raises some questions. The corporate governance question is really about the true independence of the central bank. And then the other thing which is important and has happened, I guess, over the last 10 years or so, a bit longer than that now, actually, and this really comes after the global financial crisis is the emergence of this new policy called quantitative easing because interest rates we fully understand, everyone understands kind of how they work roughly. QE is much more experimental.

But the key thing about QE, which in one sense rekindles the relationship between the monetary and the fiscal authority is that QE work precisely through the Central Bank buying in the open market, treasuries or gilts with the express intention of pushing the price of these things higher and therefore, the yields lower.

And the idea is that if you push the yields of these things lower, it would encourage other investors to invest in riskier assets they wouldn't normally touch with a great deal of enthusiasm. So basically, this will be stock prices, corporate bonds, maybe some property, those kinds of things. So the idea of QE was to try to channel money into the capital markets to make it easier perhaps for companies ultimately to raise funds in the capital markets rather than relying on the banks.

So of course, immediately after global financial crisis, we're in some degree of distress, and therefore, perhaps couldn't lend as freely as they otherwise would have done. So yes, in one sense the theory sounds fine. But of course, once you got the Central Bank buying the government's debt, the government discovers that it's got a neat way of financing its debt where it's not really open to what you might describe as market discipline.

And this creates, I think, quite a big problem. And one of the striking features over the last 10, 12 years is that government debt ratios as a share of GDP have risen at a pretty spectacular pace. I mean certainly, in peace time, these numbers have been quite extraordinary. I think you can reasonably raise the question, would that have happened so easily in the absence of quantitative easing.

And my guess is it probably wouldn't have happened. But the other thing I think which is important is that prior to quantitative easing central banks and fiscal policy people worried about the so-called bond market, vigilantes -- these were people who stalked the markets, looking for signs of weakness in monetary and fiscal policy. And if there were signs, the bond market in a particular country be sold, the yields will go up. And this would be like an early warning system to tell the policy makers, they need to make an adjustment, they need to get policy back on track.

But if the central bank is the main buyer of government bonds, you effectively have shut down your early warning system because it doesn't work anymore. So the problem here is that when you have got a genuine increase in inflationary pressures, the one measure you want to use to indicate that those pressures are becoming embedded, namely a rise in bond yields is precisely the well measured that you've turned off as a consequence of your new quantitative easing experiment.

So I think what happened was that even as inflation picked up, too many policymakers consoled themselves with the idea that bond yields are still very low. But of course, they were very low because it was the policymakers themselves who are buying the bonds in the first place. So this, I think, was a rather unfortunate series of events, which meant that when inflation did return, the policy makers were really slow to spot it, possibly even reluctant to spot it.

Nathan Hunt: It's actually an interesting inversion of there's a famous quote from James Carville who was an advisor to President Clinton, who said that he wanted to be reincarnated as the bond markets because you can intimidate everyone.

Stephen King: You're absolutely right, yes.

Nathan Hunt: And your point would seem to be that when the bond market stop intimidating policymakers, we actually lose an important function.

Stephen King: Yes. I mean, I think it's absolutely right. And you think about the way which capital markets opened up the abolition of exchange controls and capital controls in the 1970s and 1980s. What it did was effectively impose discipline on countries and stop them from going down paths that might have been ultimately not in their own interests.

Of course, some people didn't like it, people occasionally would reimpose capital controls as happened, for example, during the Asian crisis. But for the most part, the discipline of these bond markets was an important factor, particularly I would suggest in driving inflation rates down and also encouraging countries to adopt institutional arrangements that were consistent with the idea of lower inflation.

And I think what has happened more recently is that once you've reintroduced this sort of QE policy, actually not even reintroduced it, once you've invented this QE policy, then you remove those disciplines that have been previously so helpful.

Nathan Hunt: So QE reminds me of a point you make in the book, and I've heard you make in the past, money matters. What makes you say that? After all, it seemed for a while there that there was an almost limitless appetite for an expanded money supply, particularly U.S. dollars without any inflationary pressure, which led to all kinds of theories, including some crackpot theories. So what makes you say that money matters now?

Stephen King: So money matters, but also attitudes towards money and the people who produce the money, they also matter. And I think you have to see both of these together rather than separately. The reason for saying the money matters is that you look through the history of inflations, they're often connected loosely with some kind of money creation scheme.

Whether it's the debasement to the coinage during the Roman Empire or whether it's the discovery of a silver mountain in Bolivia by the Spanish in the 16th 1,600s rather. Whether it's the creation of new paper money during revolutionary times in France. I mean all these things are examples of where money matters. And attitude towards money also matter, which is why I think it's important to distinguish between the early period of QE and later periods of QE.

So at the very beginning of the process, in say, 2010 or something, there were some monetarists who were really worried that QE would immediately create inflation. And frankly, they were wrong. Why were they wrong? Well, the answer is that during the global financial crisis, stuff that people have treated as being like money. So you could even think of collateralized debt obligations or whatever credit default swaps or something as being examples of near money, this stuff was liquid. But during the global financial crisis, became incredibly illiquid and effectively worthless.

So stuff that was money or near money was being destroyed. And if you let that be destroyed and did nothing to offset it, then you would be in danger of entering in the kind of great depression mark twp. So what the federal reserve did and what other central banks did at that time was effectively to create what I would call public money to replace the private money that was being destroyed.

So the overall stock of money hasn't changed very much. It's not really inflationary. But what you're doing is creating a trusted version of money in exchange for the disruption of the now no longer trusted version of money. So that part, I think, is fine. The problem is if you continue to do QE and then during a sort of negative supply shop period, which is what we saw effectively in 2020, you sort of doubled down on your QE.

You're now creating a lot of money, public money when private money is no longer being destroyed. So effectively, you're now adding a lot to the liquidity in the system. And at that point, you do begin to have, what I would argue is a pretty significant problem.

So my book kind of going through the history of money emphasizes both the fact that money matters, which I think central banks oddly forgot about, which is itself quite extraordinary. But secondly, also the public attitude towards both money and the institutions that are responsible for producing that money, they also matter.

Nathan Hunt: You have staked out a position which is in opposition to some other economists' position on what is causing inflation right now. You sort of have described it as the bad luck theory of inflation. And the bad luck factors being difficulty with supply chain, pent-up demand from pandemic restrictions, energy market prices driven by Russia's invasion of Ukraine.

I've heard people say that inflation was entirely caused by car prices. And that if you pull that out, the inflationary numbers look pretty mild. When you think about inflation and what happened, there are obviously circumstances and there are causes. How would you differentiate those two?

Stephen King: Well, this is frankly tricky because in real time, all you see is changes in prices without knowing the full story of what is going on underneath it all. But I think the way I'd consider this is, first of all, that the degree to which economies were inflating widened over time. There was a point where people could say there were certain industries that perhaps were raising prices, and they were doing price gouging of one kind or another and perhaps that was a big driver of inflation.

But if the answer to that was price controls, which is what some people were advocating, the problem after a while was that given that oil prices are going up, we'd have to be imposing controls on virtually everything. So you'd be like as a war time situation of a kind that we wouldn't normally accept during peace times.

So the fact that so many prices were rising suggested that it was no longer a series of one-off special factors in certain areas. And secondly, even if the initial price shock, let's say, is an external event, let's say, in Europe, the big increase in energy prices as a consequence of Russia's invasion of Ukraine. Even if it's an external event, how you respond to it in terms of monetary policy still matters.

And this is an issue about whether you accommodate the price increase effectively allowing to spread through to the rest of the economy or whether you try to restrain the second round effects of that price increase. Now if you go back to the mid-1970s, if you look at the quadrupling of oil prices in 1973, we can all agree that, that was a kind of common external shock.

But when you look at the different inflation outcomes over the following five years, again, you can create a sort of a league table. And you've got the likes of Germany and Switzerland that did incredibly well. The inflation rates were no higher in the five years after the oil price shock than they had been with five years before the oil price shock.

You've got countries like the U.S. and France, which were not great. I mean they weren't disastrous but they didn't have a great time of it. And you've got countries that truly were disastrous, which includes Italy, and my country the U.K. Now if you were to sort of say, well, what's the difference? It wasn't a difference in terms of the increase in energy prices because that was common to all the countries.

The difference was the response. In the case of Germany, there was a recognition at the time that the increase in oil prices probably would be inflationary, and it was important for the Bundesbank, the Central Bank at the time. to stamp out those inflationary forces. So they kept the monetary policy relatively tight, trying to limit the extent of the shock, if you like, spreading through into the broader economy.

Whereas the U.K. treated the same shock more as a growth shock rather than an inflation shock, that meant basically that they kept monitory policy looser. So interest rates would be lower in the U.K. than they were in Germany in some sense or another. And the problem with that was that with interest rates being lower and the exchange rate, responding to that by falling, which basically magnified the inflationary problem, what you ended up with was a completely different outcome.

So even if the shock is the same, the monetary response still matters. And I think one of the problems that exist today is that even though the Fed, I think, is at the top of the league table, you could still reasonably say that all of these central banks because they were so slow to spot the so-called second round effects that perhaps monetary policy didn't responded quickly enough and hasn't gone far enough as yet to deal with these persistent inflationary problems.

Nathan Hunt: Stephen, my next question is going to be, let's say, ripped from the headlines. There has been a lot of talk about the -- raising the debt ceiling in the United States, the possible impacts of the U.S. defaulting on its credit if the debt ceiling is not raised, there is a proposal which gets a lot of discussion around the possibility of minting a coin, a platinum $1 trillion coin and we'll just fix the debt ceiling that way.

You, in the book talk about the experience in revolutionary France where they -- and I'm going to forget, of course, the word for it, but they basically issued these -- this high denomination paper currency in order to, I'm assuming, create some money supply after all of the aristocrats and people with money, had pulled their coins out of the country. Do you see a parallel between those two? Or is that a dangerous historical parallel to engage in?

Stephen King: No, not necessarily. So this comes back to the issue of the relationship between monetary and fiscal policy really. So let's imagine you go to the government. We can receive a fictitious imaginary government. It's not so far away from the U.S. and Washington at the moment.

But the sort of imaginary government that has raised taxes to a certain degree or has cut public spending to a certain degree. But it's running out of political space to carry on going in that direction. So it doesn't want to raise tax. It doesn't want to cut that public spending. But at the same time, it knows that if it carries on down this path, it's level of government debt is going to continuously rise and build and go higher and higher and higher over a long period of time.

And you might say for a variety of different reasons, this is not a desirable outcome. So you think, well, what can they do in circumstances where I can't raise taxes and they can't cut public spending, but where I have to stop the debt level rising. So one option, of course, is to default. And in effect, if the debt ceiling extension or increases is not [ part ] I mean, it's a sort of legal minefield here, frankly. But I think for a lot of people, it would look like a default.

And the idea that the world's premier nation and economy defaults is such a crazy idea that I think a lot of people are quite rightfully very worried about it. But the other option when you got a high level of debt is to print money to create inflation because what sort of matters in these circumstances is not the level of debt itself. It's the level of debt relative to the size that we might describe as the nominal economy, the value rather than the volume of economic activity that's being produced. And you can increase the value in one of two ways.

Either you have actually there's a physical increase in the size of the economy or you simply print more money, which creates more -- I mean it's not true value, of course, because you're simply creating inflation, but it effectively raises the numbers, so to speak. Now that mechanism is one which has been useful for people who want inflation for hundreds of years because inflation is a device typically that redistributes wealth away from creditors, from savers towards debtors.

So if you've got cash savings in your bank and you've got inflation running at 10% and interest rates are nowhere near 10% after a year or so, you've lost quite a lot of real spending power. And you carry on doing that for 5 or 6 years, you got virtually nothing left in your bank account in real terms.

On the other hand, if you've borrowed some dollars and then you have a dose of inflation, what you have to pay back in the future in a real sense, adjusted for inflation is less than what you borrowed in the first place. So effectively debtors often quite like inflation. Governments typically are a very large debtors, which is why all too often inflation is a mechanism that sort of seems to be a sort of get out of jail free card.

Now of course, we come back to the discussion about independent central banks and whether they're there to stock you're going down this route. But I think I can imagine a situation where let's assume that common sense prevails and the debt ceiling is raised and the U.S. doesn't default, I can nevertheless see a situation arising, whether it's in the U.S. or in parts of Europe, where people are saying, well, the cost of getting rid of inflation is pretty high, we might have that very much, there is a risk of recession.

Maybe what we should do is just raise the inflation target rather than having a 2% inflation target, let's go over 3, 4 or 5. And I think a lot of people will say, well, there's nothing wrong with that.

But the problem is that if you're doing it precisely to help fund your very large amounts of government debt, then you're basically coming back to the underlying problem, which is that you're bringing fiscal and monetary policy back together again in ways that I think would lead to suspicions in the minds of the public about what the government's true intentions happen to be. And of course, it's precisely those kinds of suspicions that mean that inflation is likely to be more persistent than would otherwise be the case.

Nathan Hunt: Stephen, one of the points you make in the book is that a lot of Central Bank behavior can be explained from sort of a fundamental fear of deflation that their fear of deflation is so great that in a sense, they pursue inflationary policies just to stay on the right side of that, and that can be called the 2% target, which well low is still inflation. Help me out here. What is so bad about deflation that it becomes this fundamental motivating factor for all central banks.

Stephen King: So you can partly blame John Maynard Keynes for this because he talked a lot about the dangers of deflation in particular, debt deflation. You can also blame Irving Fisher perhaps because both of them were sort of coming at it from different angles, but they both reached a similar conclusion, which is the deflation is a bad thing.

So the problem with deflation is very simple in what it says, which is that if you've got both prices and wages falling and interest rates have dropped to zero. They can't fall any further because cash, the actual physical cash always has a zero nominal interest rate by definition.

If interest rates can't really fall much below zero, then the more that prices and wages fall the higher are real interest rates. So in other words, if you got prices and wages falling at 5% and interest rates are at zero, then you've got a real interest rate of 5%, if prices and wages are falling at 20%, you've got a real interest rate of 20% in those circumstances.

So the cost to debtors goes up higher and higher, the more deflation you have. But this way you get into a trap because if debtors are in trouble, then defaults will go up. If defaults go up, unemployment sales, prices and wages will fall even faster. So you get into a sort of terrible doom loop of the kind that we saw in the 1930s. So that's why Central Banks are terrified of deflation. This is their version of hell I suppose. But I think the danger with this is it assumes that you can put all deflation, all kind of deflations in that one bucket. They all have the same sort of behavioral patterns.

And the big weakness of that, and this is where history matters is that in the late 19th century, this is a period of rapidly rising living standards in many different parts of the world. It also was a period of sustained intense deflation. So one of the big questions here is, well, if deflation is so bad, why was it not so bad in the second half of the 19th century.

And this requires a little bit of a reminder of the gold standard. So the gold standard was effectively a monetary standard, which is almost like a convention rather than anything else, everyone talk to it. But effectively money in any country was constrained by its links with gold. And the supply of gold didn't rise very quickly in the late 19th century, but the economies themselves were growing very, very quickly.

So you've got lots and lots of economic activity. The value of activity, the volume of activity is rising very, very quickly. But you got to fix sort of finite supply of gold that isn't increasing very greatly. Your currency is loaned to that finite supply of gold. So you've got fixed currency, rapidly rising economic activity, how can you make that sort of process add up?

Only way you can make it add up is for the volume of activity to go up, but the prices to come down, which effectively is what happens in the late 19th century. Now this was a good deflation because effectively prices were falling relative to wages and profits. So the more the prices fell, the better off people were. Now the reason why this is relevant today is that in that in the sort of 20 years or so before the global financial crisis and even in the aftermath, of the global financial crisis, there was an assumption that the Western world, Western development was faced with a kind of deflation that we'd seen or possibly seen in the 1930s, this terror of this bad deflation.

But I think in actual fact, some of this deflation was what I describe as good deflation as was the late 19th century kind. And the reason for that is the so-called great moderation with central banks themselves described as a sort of period of stable growth, low and stable inflation, joyful combination of macroeconomic developments that you always look for.

But actually, I think the great moderation was more to do with a series of sort of good luck shock to the Western world, which was mostly associated with hyper globalization, the outsourcing of capital into countries like China, India and other parts of Asia. So the West is able to import cheaper and cheaper manufactured goods for the rest of the world.

So effectively, price of these goods were falling. And one way you could have taken that in the West was to say we're going to undershoot our inflation targets rather than having inflation at 2, we'll have it a 1 or 0 or minus 2 or something like that. But so long as prices are falling relative to wages and relative to profits, we can live with that.

But actually, Central Banks were so terrified of any kind of deflation that they basically responded to this, what I described as good deflation by trying to create an offset in terms of higher domestically generated inflation. That basically meant keeping interest rates both nominal and real rates too low.

Now in this period of the great moderation, the consequence of doing there was is not to create inflation in a sort of overall sense, it was to create asset price bubbles. I think the asset price bubbles that we think of in terms of the tech bubble in the late 1990s and the subprime bubble in the mid-90s. These are partly rooted in this overly loose set of monetary policy conditions.

So when you've got the great moderation going on, you can still hit your inflation target, but you still might end up with too much the way of asset price bubbles. But recently, the great moderation, I think, is going to reverse. Even before the pandemic, obviously, relations between Washington and Beijing were not the very best as they had been.

You'd moved away from global trade arrangements to regional trade blocks. In the case of the U.K., we had a particular peculiarity, which of course, is Brexit, which is an extreme version of that kind of regionalization if you like. There had been a lot more discussion about reshoring, onshoring, near-shoring, desire post pandemic to build, we might describe as more robust local supply chains, which are costly to do.

So what you end up with is a situation where rather than having a deflationary tailwind, you've now -- but I would suggest an inflationary headwind. And that is not ideal because it means suddenly for any given level of economic activity, you're more likely to have too much inflation rather than too little inflation or, put another way, if you're going to hit your inflation target, you're going to have to have levels of economic activity than you ideally want.

Nathan Hunt: In the book, do you talk about the Great Moderation you talked about a speech Ben Bernanke gave that has perhaps not aged as well as it could have in light of current events. This question may be, let's say, excessively Calvinist -- but I'm wondering if you think we should be aspiring to a return to a new period of Great Moderation. My question is, is moderation good for us?

Stephen King: Well, it depends partly what the alternatives are, I suppose. So part of this is a political problem rather than an economic problem really, which is that the Great Moderation, as I said before, is a story about we might loosely describe as hyper globalization. To make hyper globalization work, you make it work by effectively getting rid of as many borders and barriers you usually possibly can.

You move towards a sort of single global economy. And as an economist, thinking purely about issues of economic efficiency, you would say that getting rid of borders and barrier is always a good thing. It is the equivalent of getting with road tolls or canal tolls in the sort of 17th or 18th century in Europe, you get rid of the toll, suddenly, trade opens up and everyone is better off.

So there's plenty of evidence to support this. But of course, the challenge is to make this work in the world whereby political systems may differ from one another. Now if you go back to the fall of the Berlin Eall in 1989 and the sort of euphoria in the Western world about the feature of the Soviet Union, it was very easy to buy into the idea as Fukuyama expressed it that we were facing the end of history.

This was the triumph of free markets and free-market capitalism and Western style liberal democracies. But as it turns out, we don't have that world. We have a world whereby Washington and Beijing are increasingly polarized where we have a country that may well be the biggest economy in the world within a handful of years, which is a fundamentally different political system to Americas' and where both of them have an idea as to what the global rules of the game should be, but they may not agree as to what those global rules of the game should be.

So you sort of have, sort of economic nirvana, at least from an economist point of view, bumping into political realities that prevent you from pursuing that nirvana. So as an economist, I would say, yes, a borderless barrier-less world is probably good in the sense that it raises living standards for the majority.

And even if you are vulnerable, you can be compensated by the majority, who will be genuinely better off. But I'm also conscious of the fact we live in a real world, whereby political realities intrude on economic perfectionism. And it's worth stressing that when you think about some of the sort of peculiar political pressures that have emerged in recent times, move towards popularism in certain parts of the world and so on, part of it is rooted in the sense that people generally do feel they have been left behind.

I mean if you look at -- put the U.S. to one side, just look at, say, the U.K. or France, the regional levels of inequality that have emerged are staggeringly high. And as a result, you've ended up in a situation where you've got some people being left behind who are not happy about it.

Nathan Hunt: The book once again is, We Need to Talk About Inflation, 14 Urgent Lessons from the Last 2,000 years. Stephen King, thank you so much for joining me today on the podcast. It was a real pleasure.

Stephen King: It's a pleasure to be with you Nathan as well. Thank you very much.

Nathan Hunt: The essential podcast is produced by Patrick Moroney. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I'm Nathan Hunt. Thank you for listening.

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