Category: Global economy

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Economical and financial crisis Global economy

How can we deal with inflation?

The facts are clear. Some economists have claimed in recent years that debt did not matter because they thought that interest rates would remain very low in relation to the growth rate (negative i-g) for a long time. On the one hand, this analysis was based on a bold anticipation of future inflation, and on the other, it did not take into account budgetary constraints, which, even if low when interest rates are below the growth rate, still exist(1). Thus, this assertion led to a recommendation to spend more, undoubtedly to deal with the major challenges we are facing, but without worrying about constantly expanding debt. It was as if central banks had entered an unlimited policy of quantitative easing, both in terms of duration and amount. I explained previously why (2), even assuming that inflation did not return, which was by no means sure, such a situation may not be sustainable, given the financial vulnerabilities it added to. And given the possibility of a major recession. And, finally, as the monetary system is a debt settlement system, given that confidence in money could disappear because debts can never be constantly growing faster than the real economy.

Inflation has now returned(3 & 4) and is no longer merely transitory. Let us analyse the consequences of its return in force for all players.

Central banks: they must combat inflation. This is essential, because an inflationary regime must be avoided, that is, a system in which indexation is triggered between prices and prices, prices and wages, wages and prices. Thus, the inflation rate is neither low nor stable. Such inflation creates inequalities between households, which obviously do not have the same capacity to react to protect their purchasing power. It also leads to inequality between companies that do not all have the same capacity to “set prices”. In addition, as history has shown, once the stability and predictability of the inflation rate is disturbed, confidence wanes among economic players, producers and consumers. Prices can no longer be set easily, and need to be reset several times a year, or even more in the case of hyperinflation. This undermines confidence. Between employees and companies where employee representatives may have to request a second round of negotiations within a year, or more. This undermines the reliability of negotiations between the company’s employees and management, causing tension. Between lenders and borrowers, with lenders no longer knowing how to set lending rates, as interest rates are constantly rising. This widespread uncertainty creates tension and undermines confidence, which is one of the cornerstones of economic efficiency, growth and life in society. This is why rather low and stable inflation, ideally around 2% or 3%, is highly desirable, and why central banks have no choice but to implement a monetary policy that can at best ensure inflation is maintained at this level, and, if necessary, brought back to it.

However indispensable it is, this mission of central banks is difficult under the current circumstances. If interest rates rise too sharply or too much, this can easily trigger a recession, a hard landing. It may indeed be over-calibrated, if it is assumed that the transitory component of current inflation will weaken in the near future. Supply constraints can and should indeed ease over time, excluding the consequences of the unfolding war in Ukraine, which could exacerbate shortages of energy and certain agricultural products.

However, raising interest rates too slowly would not do enough to combat the return of high inflation by allowing indexation to develop. And reacting late, once inflation expectations are no longer anchored at a low level and indexations are put in place, is much more costly in terms of growth, since deep recessions are difficult to avoid.

But there’s more. The mission of central banks is all the more difficult because we have experienced interest rates that were too low for too long. Of course, long-term and short-term rates had to be driven towards zero in order to enable us to emerge from the major crisis of 2007-2009 and the risk of deflation that it entailed. It was also necessary during the pandemic. However, as soon as growth returned (in 2016-2017), maintaining such low interest rates, on the pretext that the natural interest rate was very low, was dangerous. Moreover, the natural interest rate is a concept and not an observable variable. It is neither theoretically indisputable(5) nor easy to use. Similarly, it is possible that the very low inflation rate of the period – which quantitative easing policies did not manage to raise – was due to structural forces (globalisation and the technological revolution), with a Phillips curve made flat as a result, and not to a lack of demand, and therefore to a cyclical phenomenon. Keeping rates too low for too long has led to consequences that the Bank for International Settlements has described very well for years. When the interest rate is too low in relation to the growth rate for too long and there is a growth phase, bubbles develop. Equity bubbles, real estate bubbles and over- indebtedness of governments and private agents. Today, if rates must be raised and quantitative easing policies gradually come to an end in the face of a major risk of a change in the inflation regime. As assets (equities and real estate) are highly valued and the level of global debt is very high, central banks must face the risk of sudden bursting of these bubbles and solvency crises of economic actors with too much debt. With the attendant risks to growth(6).This situation of macro-financial vulnerability is therefore necessarily problematic for central banks, and they must therefore be very determined and very cautious. This is why they have begun to normalise their policy and will go without debate until they reach what they consider to be their neutralisation (i.e. a monetary policy that is neither restrictive nor growth-promoting) towards the end of 2022 or the beginning of 2023. But once this stage is reached, they will act according to the circumstances. If growth slows down sharply, if the markets fall dramatically, they will take action. The state of wage and price indexation, and therefore of the level of underlying inflation, will then be scrutinised to determine whether it is appropriate or dangerous to position interest rates above the rates already reached. If the inflation trajectory does not take a satisfactory downward path, we can bet that the central banks will continue to tighten their monetary policy in order to make it more aggressive, both by a stronger rise in key rates (i.e. short rates) and by sustained quantitative tightening in the United States and by its initiation in the euro zone, thus contributing to a stronger and more rapid rise in long interest rates.

Central banks must remain credible in the face of inflation. They must be clear in their statements, showing an unwavering determination to fight it. Conversely, they must be gradual and prudent in their actions, without however being dominated by governments or financial markets.

Governments, for their part, have no choice but to have a credible medium-term solvency trajectory(7). An excessively strict fiscal policy would destroy growth, but doing nothing when the level of indebtedness is high would considerably undermine their credibility, causing a high risk on the public debt markets in the short term. They therefore need to put in place a policy of managing public finances without austerity, but which in reality provides an exit from any kind of support policy, with a focus on the weakest populations, must therefore be put in place. The pandemic, by its very nature unexpected, brutal and temporary, should clearly be differentiated from a possible change in inflation regime.

In addition, the investments needed to increase potential growth or green growth must be financed. However, this financing must be secured by more rational and efficient management of public spending, particularly current expenditure, as well as by structural reforms(8). These are absolutely necessary for increasing potential growth, for public finances and for increasing supply, which is itself a factor in the fight against inflation. Certain supply-side policies may have positive effects quickly, others more in the medium term, both on inflation and on growth. This includes policies that increase the employment rate, such as pension reform, as well as unemployment benefit reform. The shortage of jobs in recent months is in fact preventing the supply of goods and services from being higher, as well as supporting the phenomenon of (partial) wage indexation.

Companies with too much debt, for example according to the ratios proposed by the ECB itself, must

pursue a reasonable but real deleveraging policy in order to better get through this coming period of rising interest rates and fewer financing facilities.

For households, the question of purchasing power arises(9). It will be difficult to preserve it completely. For companies, it will not be possible to index systematically wages to inflation. Moreover, since 1983, the Delors and Bérégovoy Act has prohibited companies from indexing wages to prices. If they did so, they would precipitate rising inflation and also destroy their competitiveness or profitability, both of which would severely reduce their ability to invest and employ in the future. Companies cannot therefore do everything. And they can only act according to their specific situation. It is also impossible for governments to protect everyone against inflation over the long term, as for many of them, their fiscal room for manoeuvre has already been tested. It should also be noted that such a policy is contrary to that pursued by central banks. This non-cooperation between economic policies could prove dangerous in terms of financial stability. The generalised support of purchasing power, together with insufficient supply, is also precipitating the deterioration of the foreign trade deficit, which has already been affected by the rise in the cost of imported energy. The rise of interest rates will further accentuate the budgetary constraints of the States, for those of them that are more indebted. There is still a possibility of protecting households’ purchasing power as effectively as possible: we are in a special situation in which inflation needs to be reduced, purchasing power protected and a proven labour shortage needs to be addressed. Most companies are short of employees. Increasing wages a little in exchange for a moderate increase in working hours could be part of the solution, as long as it is the choice of companies and employees themselves.

This would be good for growth, good for public finances and good for foreign trade.

CEO of BRED and Professor of Financial Macroeconomics and of Monetary Policy at HEC Paris

Bibliography :

Categories
Economical and financial crisis Global economy

Inflation and purchasing power: breaking out of an impossible equation

Inflation has just exceeded 5% in France and growth for the first quarter fell by 0.2%. Companies will not be able to (and should not) compensate for the entire loss of employees’ purchasing power, as this would lead to a drop in their results, which would sooner or later undermine their investment capacity, their competitiveness and therefore employment capacity, especially since they have already been financially weakened by supply difficulties and the rising cost of raw materials and many intermediate products.

This would therefore be very damaging to households themselves in the long term. It would very dangerously strengthen the indexation spiral, with inflation then spiralling out of control. This is why, since 1983, companies have been prohibited from systematically indexing wages to prices.

At the same time, the French government will not be able to protect households over the long term as it has done today by taking on their extra costs. Monetary policy will no longer make it possible to finance the resulting excess public debt, and the markets will probably be less willing to swallow this extra debt at today’s rates… a very worrying snowball effect on debt could ensue.

As such, households will to a certain extent lose purchasing power while inflation remains high, taking their part of the burden, with the resulting economic and social risk. Companies will also be required to contribute. The government will increasingly limit itself to protecting the weakest.

However, this loss of purchasing power is not inevitable. Working households could better protect their purchasing power without leading to a wage-price loop if productivity gains were sufficiently high or if the wage-to-value ratio remained broadly stable following wage increases. This would allow companies not to increase their prices further and protect their competitiveness and their capacity for employment and investment.

The solution would be for employees to work a little harder in exchange for higher pay, in a proportion to be negotiated.

Unfortunately, productivity gains are now zero. The only possibility for the economy to come out of this in the best possible way – for households, companies and the government – is for employees to work a little harder, depending on their type of job, in exchange for an increase in wages, in a proportion to be negotiated. This is possible, as there are bottlenecks due to labour shortages in many sectors.

Thanks to the increase in activity, this would also boost receipts from social security contributions and taxes without raising their rates, so would help maintain our high level of social protection, while promoting better control of the public deficit and debt. Retired households can only maintain their purchasing power if the number of years of contributions of working people is increased (depending on how hard the work is), although pension accounts will continue to deteriorate.

There is a real room for manoeuvre for France. In addition to the efforts companies can make to partially limit the loss of their employees’ purchasing power – a mix of wage increases and PEPA bonuses, for example – it is perfectly possible, without changing the law, to open negotiations at company level before the end of the year on this additional compensation in exchange for additional work. It is also possible and advisable to consider company agreements that allow each employee or team to choose their own balance.

In any case, it a way out of a major problem that could otherwise quickly become an impossible and painful equation.

Categories
Euro zone Global economy

Inflation, interest rates and debts: an explosive cocktail

Should central banks have to finance public deficits linked to reindustrialisation, climate change or rearmament over the very long term, as opposed to the “we’ll do whatever it takes” approach that only lasted as long as the pandemic did? Does the debt not matter, in that case? Trapped by too many contradictory objectives, extremely accommodative monetary policies would then be prolonged, with interest rates remaining well below the growth rate and central banks’ balance sheets continuing to swell. No way! This is a convenient idea, but it’s a recipe for a very painful future. So, central banks are taking a different path.

Before the war, because inflation was more than only transitory, central banks had to exit quantitative easing and raise their interest rates gradually. But because of very high global debt levels and high valuations on financial and real estate markets, they toughened their tone cautiously when a strong surge in inflation occurred due to the war in Ukraine. An inflation that gets out of hand through indexation, even if imperfect, of prices to prices and wages to prices would indeed be a source of many evils. It would de facto lead to a significant inequality in income trends in real terms, both between households and between companies, as the ability to pass on price rises would be far from equal. Wage negotiations would become very contentious; price signals between producers, distributors and consumers would be unstable; loan contracts would lead to a disruption in the way interest rates are set between lenders and borrowers. Stable and low inflation is indeed essential for confidence among market participants, and therefore for an efficient economy. Today, faced with the threat of stagflation, central banks are faced with an even more delicate dilemma.

They must not undermine this weakening growth, but they have no choice other than to react if they have any hope of combating the major risk of uncontrolled inflation. \Therefore, if and when central banks normalise their monetary policy, they will have to do so with a great deal of clarity for the sake of their credibility, but also with great caution. They will have to test the effects on the financial markets, including government debt, at each stage. The ECB has an additional challenge: the eurozone is made up of countries with very divergent economic situations. At the same time, governments will have to show a credible fiscal trajectory, by making investments that promote potential and greener growth, but also by protecting the poorest from inflation… Structural reforms will also be essential, and more than ever, to facilitate growth and to participate in the solvency path – we are talking in particular about that of pensions in France. This narrow path is the only one possible.

If central banks were to perpetuate ad libitum a policy of financing public deficits and maintaining excessively low interest rates, serious financial crises due to the bursting of increasingly uncontrollable bubbles would cascade, structurally damaging growth. Inflation would sky-rocket to the detriment of the weakest and damaging the overall efficiency of the economy. And, sooner or later, confidence in money itself could be called into question. The flight from money would eventually lead to the collapse of the economy and the social order. Historical examples bear witness to this. Monetary policies will therefore tighten and interest rates will rise. There is little time left for highly indebted agents, public or private, to prepare for this.

Categories
Bank Global economy

Conference on « The rise of financial instability»

portrait Olivier Klein
Conférence-Débat-Risques-17-nov-2021-_1-3-nov-_-ENTélécharger
Categories
Euro zone Global economy

There is no such thing as magic money… or, how to get out of the debt trap

Conventional and unconventional monetary policies play an essential role during serious crises. They push both short and long interest rates to very low levels, below the growth rate. These very low rates have a direct, favourable impact on demand and an indirect impact by increasing the value of capital assets (notably, real estate and equities). The policies also facilitate deleveraging by making it easier to repay debt. Even spreads are pushed down to ensure that they won’t trigger a catastrophic bankruptcy chain reaction via a brutal increase in insolvency.

However, when these monetary policies are in place for too long, they can become a serious source of danger and a significant risk to financial stability. It is very important, and even indispensable, for central banks to adopt these types of policies in certain situations, from major financial crisis to the deep recession resulting from the handling of the economic consequences of the pandemic. However, they can lead to a problematic asymmetry when growth returns with a significant increase in credit and central banks fail to reverse their policies, do so incompletely, increase their interest rates by too little or fail to reverse their quantitative easing policies, or do so incompletely.

Growth in the eurozone recovered satisfactorily by 2017 and credit was again being issued at a high pace. However, the ECB’s policy remained unchanged. The reason given was that inflation was still too low, that is, the target inflation rate had not yet been reached. In the eyes of the central bank, this justified maintaining an ultra-accommodative monetary policy. However, could monetary policy cause inflation to increase? Wasn’t inflation structurally, and not cyclically, very low? In this type of situation, it became dangerous to continue the policy for too long because it maintained interest rates below the growth rate: interest rates were kept too low for too long. This caused the return of a financial cycle with debt rising faster than economic growth and the return of capital asset bubbles, notably in real-estate and equities. It was accompanied by a loop effect, as are all financial cycles, because, in this case, debt was also used to buy capital assets, which fed the bubbles and facilitated the accumulation of more debt.

Whenever interest rates are kept too low for too long, the financial vulnerability of the overall economy increases with significantly more serious risks on balance sheets, in the assets of some groups and the liabilities of others.

1. In the assets of financial investors and savers. In this type of interest rate situation, these players look for returns at any cost, since interest rates are too low. They take on more and more risk in order to obtain it. Risk premiums are thus compressed in a way that is completely abnormal and dangerous: when the bubbles burst, spreads simply cannot cover the cost of proven risk. The assets of savers and of the financial investors who work for them (pension funds, insurers, investment funds, etc.), are thus vulnerable. Starting before the pandemic, this led to a historical drop in yields on investments in infrastructure, to historically low credit spreads on high-yield and investment-grade debt, to very high valuations for listed and private equity companies, to investment funds holding increasingly illiquid assets and/or with very long maturities while ensuring the daily liquidity of those same funds, etc.

2. In borrowers’ liabilities. Borrowers tend to take on too much debt in this type of environment, since the cost of money is low compared to the growth rate, resulting in excessively high leverage. This includes, among other things, share buybacks by companies, notably in the United States, making those companies vulnerable as well. They are vulnerable to a drop in cash flows linked to a slowdown in growth as well as to an increase in interest rates. This, in turn, leads to a significantly greater risk of insolvency in the future.

The combination of the two points above creates a situation of strong global financial vulnerability. In addition, the situation results in an increase in the number of zombie companies, i.e., companies that continue to operate although they are not structurally profitable. They would go bankrupt with normal interest rates, that is, equal to the nominal growth rate. This makes the overall economy less effective and weakens productivity gains.

Maintaining interest rates too low for too long, when they are no longer required to fight insufficient economic growth and credit, therefore creates a very risky macroeconomic situation in the long term. An asymmetrical reaction in monetary policy can lead to serious financial crises.

This was the situation pre-COVID-19. The financial situation thus became catastrophic at the very beginning of the COVID crisis because the pandemic produced a dizzying drop in production and violent contractions in income and cash flows for companies in several sectors. By the end of March, the financial crisis caused by COVID was already more severe than that of 2008-2009, with stock-market volatility twice as high, spreads shooting up violently, and sudden very problematic liquidity shortages, particularly for investment funds. Fortunately, the central banks responded extremely quickly: they lowered their rates when it was still possible to do so, notably in the United States. They also began to buy public and private debt, including high-yield debt, and sometimes even equities, considerably expanding their quantitative easing policy. They also productively adapted the macroprudential adjustment measures. Central banks quite rightly made it possible to relieve a catastrophic financial situation within a few weeks and supported the efforts of governments in favour of the economy through the massive use of unconventional monetary policy.

If the pandemic doesn’t start up again, the question will arise as to how we can exit this monetary policy when growth returns consistently to a satisfactory level, given that government and company debt has increased much more than before the pandemic? Without abruptly ending the extraordinary support measures implemented by governments and central banks, we will have to start thinking now about the eventual exit from an exceptional situation in which central banks were right to temporarily suspend market logic by putting the monetary constraints for private and government borrowers on hold.

We will be faced with high levels of government and company debt as well as capital-asset bubbles. If we raise rates too quickly via a poorly-planned withdrawal from Quantitative Easing, it could have a disastrous effect on solvency in the private and public sectors. This could lead to a crash in capital-asset markets, which would increase overall insolvency. The exit must, therefore, be very gradual and controlled.

Note that, if inflation wasn’t merely a transitory phenomenon (it is currently increasing because the restrictions weighing down on economies have been lifted and the labour shortage experienced in many high and low added-value sectors is dissipating day by day) this would raise very complex issues for central banks. Should they maintain the solvency of economic agents at the cost of potentially uncontrollable inflation? Or do the opposite?

But, even if a new inflationary period doesn’t arise, should central banks continue their quantitative easing policy ad infinitum if governments and companies do not nolens volens pay down their debt? This would result in structurally higher financial instability, both in terms of over-indebtedness and increasingly extreme bubbles, with the very serious economic, financial and social instability inherent to the inevitable resulting crises. There would be an increasing moral hazard since borrowers, both private and public, would no longer fear over-indebtedness. In addition, investors would understand that they have a free hand thanks to the central banks, which will always protect them from crashes, with no repercussions, and would thus be encouraged to underweight the price of risk in their financial calculations over the long-term. Lastly, the economy would see more and more zombie companies and less of the creative destruction necessary for growth. This would lead to a lasting decline in productivity gains that would, among other things, structurally slow down gains in real purchasing power.

Ultimately, the risk of the unlimited monetisation of debt would also lead to a catastrophic capital flight. A healthy and effective monetary system is, in fact, a reliable and trustworthy debt settlement system. Therefore, if artificial solvency was achieved due to the long-term use of overly-low interest rates, the debt level could continue to rise without any apparent constraints until it created a real crisis of confidence in the value of debt and, eventually, of the currency.

To maintain their credibility and, therefore, their effectiveness, during future systemic crises, central banks must protect themselves against the known risk of fiscal dominance as well as against financial market dominance. In other words, they cannot be dominated by governments, which might demand continuous intervention by the banks to ‘guarantee’ their solvency. However, they shouldn’t be dominated by the financial markets either. Central banks need to be in a strategic relationship with the financial markets. However, they can’t be afraid of channelling them insofar as possible toward areas of sustainable fluctuation, or to counter collective perceptions and opinions when groupthink results in speculative bubbles. They must do so even though markets today are consistently asking for more monetary injections to continue their upward momentum. Jerome Powell, the chairman of the American Federal Reserve said recently, and quite rightly that: “The danger is that we get pulled into an area where we don’t want to be, long-term. What I worry about is that some may want us to use those powers more frequently, rather than just in serious emergencies like this one clearly is”.

However, alongside the policies of the central banks – which need to start thinking now about the best way to eventually escape their ultra-accommodative policies – we need fiscal policies that are sustainable in the medium-term, while taking care not to cause a recession by acting too quickly. It must also be made clear that there will be no ‘magic money’ and that the measures taken during the pandemic were extraordinary and cannot, under any circumstances, be continued over the long term. Governments must therefore implement structural policies (investments and reforms) which are indispensable to increase the growth potential of their economies. They must immediately start to explain that it is time to mobilise to facilitate growth through more work. In France, notably, via pension and labour market reforms, given that many French companies are facing bottlenecks, including in hiring. Ultimately, this is the best way to gradually escape over-indebtedness.

Central banks cannot do everything on their own. Expecting too much of them can be dangerous for the economy as well as for their own effectiveness, when they are called upon again.

Olivier Klein : The crucial role of commercial banks – Banque & Stratégie april 2001
https://www.oklein.fr/en/the-crucial-role-of-commercial-banks/

Olivier Klein : The post-Covid economic paths are very narrow – Les Echos February 16, 2021
https://www.oklein.fr/en/the-post-covid-economic-paths-are-very-narrow/

Olivier Klein : Not repaying debt: risk of a loss of trust in money and risks for society – complete version – Les Echos November 2020
https://www.oklein.fr/en/not-repaying-our-debt-risk-of-a-loss-of-trust-in-money-and-risks-for-society-complete-version/

Olivier Klein : Post-lockdown: neither austerity nor voodoo economics – Les Echos May 2020
https://www.oklein.fr/en/post-lockdown-neither-austerity-nor-voodoo-economics/

Olivier Klein : The debt issue : risk of financial instability and of a loss of trust in money – Conference EuroGroup 50, 12 décembre 2020
https://www.oklein.fr/en/the-debt-issue-risk-of-financial-instability-and-of-a-lost-of-trust-in-money/

Categories
Economical policy Global economy

The return of inflation ?

The post-pandemic period is triggering a strong rebound, and it will take time for supply chains to recover and supply to adjust. As a result, most economists believe that inflation will only be temporary. Moreover, structural reasons for very low inflation persist. In fact, inflation is curbed by globalisation, which keeps the prices of labour, goods and services contained, and the technological revolution, which reduces the bargaining power of low-skilled employees and which, through the dissemination of digital technology and robotisation, allows for productivity gains. It should be noted that since the 1980s, there has been a decorrelation between monetary growth and inflation. And since the 1990s, the Phillips curve has nearly disappeared, as a rise in employment no longer leads to price growth. But what are the reasons that the rise in inflation could be sustainable? 

If we look at the long history since the 19th century, we have been experiencing long cycles of inflationary regimes, where the economy is dominated by monetary policy, which fights inflation by dragging down growth when inflation accelerates too much, and vice versa. We also observe alternating long cycles of low inflation, due to the effects of globalisation and technological revolutions. Such a low inflation cycle was in effect at the end of the 19th and start of the 20th centuries, as in the past thirty years. The current cycle has already lasted for a very long time. This is not a sufficient reason to believe that it will end, but this is a cause for reflection. Today, by removing the lid on the economy during the pandemic and with very strong support and then stimulus policies, prices are rising. And the risk of returning to an inflationary cycle re-emerges, a risk that we have not experienced for a long time.

If the pandemic does not lead to “the world after”, it has significantly accelerated the changes that were already under way. In the United States, but also in Europe, there are labour shortages in many sectors, including in low-qualified services, even though overall employment has not returned to its previous trough. As a result, wages are increasing significantly at McDonald’s and in high value-added companies to attract new employees and retain them. Macroeconomic analysis can give false indications if it only focuses on aggregate figures. Let’s add that Biden rightly wants to increase low wages. But the pace and intensity of these increases will be critical. In addition, in most OECD countries over the past few decades, real wages have risen below productivity gains, which is a deformation of the value-added sharing process, to the detriment of employees. Thus contributing to populist reactions and leading to possible future demands, sooner rather than later, for higher wage growth.

With the developments of history in the background and the major economic and employment changes in progress, the sharp rebound in the economy and the resulting significant rise in prices could, if necessary, and if the pandemic does not resurface, trigger a new indexation of wages to prices, and then an indexation loop that could lead the world into a new inflationary cycle. The growing cost of the necessary energy transition may also weigh on a sustained rise in prices. Nothing is certain, far from it, but the scenario should no longer be ruled out.

However, we wager that the central banks, thereby demonstrating their independence vis-à-vis governments and financial markets, would act when growth returns to its medium-term trend to stop such a return to an inflationary cycle. The resulting rises in interest rates would be welcome to curb the speculative bubbles that are currently forming. But governments or companies that are highly indebted should prepare as best as they can by taking structural action on their solvency trajectory.