Louis Gave: Inflation Will Come Back With a Vengeance

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Yes, I think inflation will come back with a vengeance. One of the key deflationary forces in the past three decades was China. I wrote a book about that in 2005; I was a deflationist then, as my belief was that every company in the world would focus on what they can do best and outsource everything else to China at lower costs. But now, we’re in a new world, a world that I outlined in my last book, Clash of Empires, where supply chains are broken up along the lines of separate empires.

 Let me give you a simple example: Over the past two years, the US has done everything it could to kill Huawei. It’s done so by cutting off the semiconductor supply chain to Huawei. The consequence is that every Chinese company today is worried about being the next Huawei, not just in the tech space, but in every industry. Until recently, price and quality was the most important consideration in any corporate supply chain. Now we have moved to a world where safety of delivery matters most, even if the cost is higher. This is a dramatic paradigm shift.

"Cover Your Ass": The Guiding Principle Of Our Time

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What is the dominant guiding principle of western societies today?

At the risk of sounding crass, let me suggest that it is the “cover your ass” or CYA principle. This principle has always been fairly prominent in participative democracies. But now it has gone into hyper-drive - so much so, that the CYA principle is also now an important driving force even in financial markets.

Now that every policy choice is reviewed and debated in real time by millions of people around the world, CYA has become all-important. Politicians have to put policies in place to hedge against the wildest tail risks imaginable. At the same time, the first instinct of policymakers (and of investors—but more on this later) is to avoid doing anything that diverges too far from the pack. Any policymaker anywhere looking at the opprobrium heaped on Sweden will surely agree with John Kenneth Galbraith’s observation that “it is far, far safer to be wrong with the majority than to be right alone”.