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The case for stagflation rests on mountains of government, corporate and household debt; interest rates staying lower for longer to make the interest bills affordable; and how that combination keeps alive zombie companies, who hog capital and hold back productivity, rather than wither and release that capital so that it can be used more effectively elsewhere.

This scenario is the rarest of the lot, although the experiences of Britain and America in the late 1970s show how gold did well (central bankers can print money to pay the interest on debt and other government bills, but they can’t print commodities), as did asset-light and debt-light businesses and companies with pricing power – generally defence stocks and consumer staples.

The case for Goldilocks rests largely on faith in central bank omnipotence and a return to the 2010s: central bankers prove able to balance growth and inflation and the world returns to a period of cheap labour and goods (through globalisation), cheap money (thanks to those same central bankers), cheap energy and relative geopolitical calm.

To this column’s mind, Goldilocks is the least likely. It seems unfeasible that nearly 15 years of extraordinarily unorthodox monetary policy, followed by an enormous fiscal splurge during lockdowns, will be followed by a smooth glide path back to “normality” and where we were before.

In this respect, it would be unwise to assume that what worked in the 2010s – bonds, growth and technology and “long-duration” assets in particular – will work so well in the 2020s, even if that is what the US stock market in particular seems to be telling us right now, given the ongoing predominance of tech stocks.

This column’s view is that inflation is here to stay, thanks to more expensive labour, energy, goods and above all money and it will continue to base its stock selection accordingly.

Yes, money too: higher interest rates could be the cause of inflation, not its cure, as they wipe out zombie firms and profitless disruptors to limit supply on the one hand, and boost the disposable income of the previously interest-starved cash-rich on the other.


Russ Mould is investment director at AJ Bell, the stockbroker

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