Economic predictions 26 December 2021

Mark McIlroy



I believe that we're going to have 'stagflation' again, i.e. a combination of high inflation and low economic growth which economic theory says is impossible but which actually happened in the 1970's.

This is what I think will happen:

1. Governments will run large deficits due to Covid related spending.

2. As this is a form of printing money, inflation will start to rise.

3. Central banks will increase interest rates in an attempt to lower economic growth and hence inflation.

4  This will have the desired effect of lowering economic growth. However governments will at the same time run budget deficits to prevent the economy falling into recession due to the high interest rates.

5. This combination will result in economic growth falling but inflation staying high, hence stagflation.



Overall my thesis is that:

1. Budget deficits do have the desired effect of preventing recessions. However:

2. Budget deficits directly cause inflation (as they are a form of printing money).