World Faces Rare ‘Inflationary Depression,’ Says Keynes Scholar

(Bloomberg) -- The world economy could face a unique “inflationary depression” as it emerges from lockdowns, with government spending propping up demand even as unemployment soars, according to economic historian Robert Skidelsky.

What makes the economic shock from the coronavirus different to the Great Depression, he said, is that shuttering industries to control the disease has yet to cause a plunge in purchasing power -- largely because governments have stepped in to subsidize wages.

In Europe alone, that support has so far saved about 40 million jobs. It's also going to push prices up, according to Skidelsky, author of a three-part biography of the British economist John Maynard Keynes.

“As we come out of the lockdown, there is going to be a depression and inflation at the same time,” he told Bloomberg TV's Tom Keene and Francine Lacqua in an interview. “It's very, very unusual.”

Central banks in advanced economies, which struggled to raise inflation after the global financial crisis, are now grappling with deep recessions and a record plunge in oil prices. In the view of most economists, that makes deflation the biggest threat.

But some warn that the strong support for demand coming from fiscal and monetary easing -- combined with the damage to the economy's supply side, as production and transportation of goods are disrupted -- will lead to higher prices.

Some degree of inflation would help governments meet the cost of their massive bailouts, according to Skidelsky, who's also a member of the U.K. House of Lords. “It's a form of tax,” he said. “Or you could actually tax openly just by increasing the rate of tax.”

He said there's some precedent in the “stagflation” of the 1970s, which led to a turn away from the Keynesian approach of using government budgets to manage the economy, and central banks taking the lead instead.

But the response to the coronavirus has blurred the lines between fiscal and monetary policy, as central banks keep borrowing costs down to help governments spend their way out of the crisis.

One consequence could be a rise in prices, Skidelsky said. He added that the big post-crisis challenge will be to set up mechanisms for government spending that aren't constrained by “artificial” rules, but are robust enough to prevent politically motivated splurges.

“Governments with their own central banks can just get enough money to spend whatever they want,” Skidelsky said. “People find that uncomfortable, but it's true.”