It’s June 11 and today we talk inflation
Remorseless, insatiable inflation. The auto-cannibalistic monster that eats away at its own flesh and
destroys economies from within.
We’ve been living in fear of it since the 1970s. But, like the troll under the bridge,
it’s never really shown its head in the real economy, only in house prices and financial
assets.
Today I present ten reasons it could make an unwelcome return. We don’t say it will
- we just say it could...
1.Deglobalisation: Love it or loathe it, globalisation has brought us cheap goods a plenty. China
has become manufacturer to the globe and, in doing so, exported its low labour costs
so that you and I can have cheap computers, clothes and consumables, durables and disposables.
But protectionism and coronavirus are both forces for deglobalisation. Deglobalisation
will have the opposite effect on prices to globalisation – it will push them up.
2. Money printing: Have you any idea how much money has been printed – or whatever the
digital, virtual equivalent of printing is – since the coronavirus hit? I’m not sure
anyone does. Extraordinary amounts. At least an entire USA’s worth of annual GDP in three
months. All that money’s got to go somewhere.
3. Fiscal spending is being directly paid for with printed money: In the “prudent”
money printing of the post-2008 era, central banks would buy government bonds and financial
assets, and money was created that way. This time around the Bank of England is printing
directly to fund government coronavirus spending. Consequences, dear boys, consequences.
4. Revenge spending: It’s not just about how much they print, it’s about where it
goes and how quickly it goes there. “Velocity of money,” as they call it. The groovy new
saying for the burst of sales expected in a post-lockdown rebound is “revenge spending.”
China saw lots of it when business re-opened there. If Western consumers do the same, then
a large “revenge spend” will be one way by which velocity increases.
5. This time the money is going into the real economy: Post-2008 all that QE (quantitative
easing) went into financial assets. This time around, whether it’s via all the inventive
new bank lending schemes, furloughing, VAT postponement, or other means, the money is
going to go into the real economy. Some will use it to pay down debt, others will spend
or invest it. Either way the money has come from zero economic output. More money sloshing
around implies greater velocity of money and higher prices.
6. Weak dollar: Donald Trump, US president, wants a weak dollar. He’s said so many times.
The Federal Reserve now seems to have got with the programme so that, since March, the
dollar is down by almost 10%. Trump is getting his way.
“A weaker dollar is like a tax cut for the rest of the world,” says Charlie Morris
of Atlantic House. “It makes it easier for the emerging markets to repay their dollar
debts. It puts upward pressure on weak currencies, which then enjoy capital flows. That leads
to economic activity, which boosts commodity demand and causes equities to rise. A stronger
economy also sees rates rise and a boom in real estate follows.”
It’s all inflationary.
7. Commodities: Commodity prices, relative to the S&P 500, are the cheapest they have
ever been. They could get cheaper, of course. But sooner or later money flows will change,
and that trend could change pretty quickly. A weak dollar puts a lot of upwards pressure
on commodities prices.
Governments’ fiscal spending on infrastructure projects means they will need commodities.
But, guess what, because commodity prices have been so low for so long, the investment
hasn’t been there, and so there will be a shortage. Which means prices will rise until
new supply comes online. But getting new supply online, particularly of metals, can take a
long time. The implication, then, is rising prices of raw materials.
8. Higher energy costs: Oil got absolutely hammered during Covid-19 as we all know. The
price of one key benchmark even went negative. But since then the price has gone ballistic,
rising every day relentlessly, it seems.
As economies pick up there will be more demand for energy. But there will also be oil shortages
as a result of the coronavirus. Again the implication is higher oil and energy costs,
generally. At $40 a barrel, West Texas Intermediate is already up 500% since April. Bet you see
$100 before we see $10 again.
9. Unemployment: One theory says unemployment is deflationary. People have less money and
so they spend less. But unemployment and inflation seem to go hand in hand, particularly where
money is fiat.
Many businesses are going to go bust because of Covid-19, meaning higher unemployment.
Many other businesses are using Covid-19 as an excuse to clear unwanted staff off their
books and slim down. Either way, higher unemployment is coming.
On a podcast I appeared on last week, Chris Snowdon of the Institute of Economic Affairs
was projecting unemployment of 4-5 million. As I say, inflation and unemployment often
like to go to the dance together.
10. Higher taxes: They’re coming too. Again higher taxes should be deflationary - they
leave less money in people’s pockets. But it doesn’t always work like that. If inflation
and unemployment are going dancing, taxes will, as sure as eggs are eggs, be there as
well. They’re the gatecrashing threesome nobody wants at their party, but if they decide
they want to come, they’re coming, whether you like it or not.
So there you go - 10 reasons we could see inflation make a very unwelcome return.
It’s worth adding that temporary government policy almost always becomes permanent. Just
as QE was supposed to be temporary, so will many of the recent spending programmes be
normalised.
If something doesn’t work, it will be because they didn’t do it enough - and so they will
just do more of it, and thus will full-on amputations in the economy occur where just
a plaster would have done the trick.
Both in the US and the UK, monetary policy will remain accommodative. Jobs need to be
created and that won’t happen with tighter monetary policy, runs the thinking. That means
a whopping government deficit and increased debt. These they will attempt to inflate away.
This is all, of course, assuming the government bond market allows it to happen. But then
- suppressing interest rates is what all the money printing is for.
Thanks for watching.
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And you might also be interested in my book daylight Robbery - how tax shapes our past
and will change the future.
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I recommend the audiobook version. Read by me with my beautiful voice.