- [Narrator] Hi guys, just a quick little announcement
before today's video.
I know that a lot of you prefer to listen to these videos
so I want to let you know that the entire EE library
is up on Spotify so you can listen to it on the go
without ads.
Either way, I hope you enjoy the video.
If 2022 was defined by one economic problem,
it would be inflation.
Inflation in most advanced economies
around the world right now is running very high
with some countries once famed for their monetary stability
seeing double digit annual price increases.
These are also just the headline figures
which don't account for a lot of the expenses endured
by real households even though that's technically
what they're supposed to do.
Interest rates are perhaps the obvious example of this
because they are somewhat of a double-edged sword.
They are the primary tool that central banks can use
to reign in inflation but they also cause interest payments
for regular households to increase at the same time
that they are struggling to pay
for everything else in the world
that's suddenly 50% more expensive
than it was two years ago.
These are just advanced economies as well.
Select developing economies are running
double digit monthly inflation, but for the most part
these isolated examples are having these problems
because of things like bad governance
and a refusal to raise interest rates
like everybody else is trying to do right now.
I'm not gonna name names, but I will say that it's ironic
that Thanksgiving is coming up soon.
Raising interest rates in countries
that still have consistently high inflation
is the right move even if it is bitter medicine.
But as with most things, a prevention is better than a cure.
So perhaps the most productive way to understand
what is truly causing persistent inflation
in our own economies is to look at other economies
that aren't having that problem at all.
Even if the lessons of places like Switzerland,
select European countries, and yes even China
are too late to implement in our own economies now
they can potentially teach us a lot
about why inflation actually happens
and how to avoid it in the future.
So why are select countries from around the world
not having the same problems with inflation
that every other country is?
Could we just do what they are doing
to fix this inflation issue ourselves?
And at what cost do these economies
gain their immunity from inflation?
Once we have done all of that
we can put the economy of Switzerland
on the economics explained national leaderboard.
One of the most important things
to understand about inflation
is that inflation is goods and services
becoming more expensive
not money becoming less valuable.
That might just sound like a different side
of the same coin, but it's really important.
The reason this is important to understand
is because different areas
can have different rates of inflation at different times,
even if they are all using exactly the same currency.
This is normally not recognized
because inflation is measured on a national level
and nations almost always use a single currency.
But inflation in California, for example
can be significantly higher or lower
than inflation in Michigan at any given time.
When you think of inflation as the rising costs
of goods and services this makes much more sense
because different issues impacting market prices
can impact different regions.
Yes, one way inflation can be increased
is by governments and central banks
injecting lots of cash into the economy
to increase total demand.
More demand naturally leads to higher prices
but there are other ways the inflation can come about
that are more specific to individual regions.
Michigan, for example, might have a particularly cold winter
which increases demand and therefore the price of energy
to keep homes warm while California
with its more temperate climate won't have the same problems
and therefore won't experience that rising price level.
Another real example might be the tech boom
that took place in California during the 2000s and 2010s.
Lots of high paying local jobs
created a region of household demand
much higher than the national average,
which is why most things in Californian cities
cost more than the same things in our regional town.
If you have been looking at reported inflation figures
in your own country
you would've seen figures of around 6 to 10%
and I'm sure a lot of you would've thought
that that couldn't possibly be true
because your own cost of living had increased
so much faster than that.
Well, there's a good chance you are probably right
because inflation is measured
using the increasing price of the consumer price index,
which is a diverse selection of goods and services
indicative of the spending of a regular urban household.
So in a twisted way, inflation has been even worse
than the news has been reporting
not only due to inconsistent indexes,
but because inflation is a black hole
decimating everything in its surroundings,
like stocks and bonds long touted
as the perfect complimentary investments.
They've lost $36 trillion this year.
That's more than the GDP of the entire United States
and that's why this video was sponsored by Masterworks.
Now, the average 60/40 portfolio of these stocks and bonds
that millions rely on is having the worst year
in a hundred years, down 34%.
But Morgan Stanley, one of the biggest banks in the world
may have a way to rescue your sinking portfolio.
They say including alternative assets
would potentially lower volatility and increase returns.
But which alternatives?
Not just gold or real estate but fine art.
CNBC says, the global rich see fine art
as a hedge against inflation
and perhaps a safer store of value
than increasingly volatile stocks and crypto.
No wonder Citi reports, the total median expenditure on art
could hit double its level last year.
That's in 2022 where we saw
the worst start to the stock market in 50 years.
The difference is astounding
and really exciting for investors
looking to recoup some historic losses.
So how do you invest in art yourself
without spending millions?
With Masterworks.
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These are not NFTs.
This contemporary art has outpaced the S&P 500 by 131%
for the past 26 years, even during the roaring bull market
of the last decade.
That's how Masterworks has managed to deliver returns
even in a year fraught with disaster.
In fact, they sought a painting just over a week ago
for a 17.5% net return.
That brings their three most recent sales
to over 17, 21 and 33% net returns.
As a result of this standout performance
Masterworks has had to acquire and release
more art onto their platform to meet demand
and there is a wait list to join
their 550,000 plus other members,
but you can skip it
just by clicking the link in the description.
If you live away from a big city
or have abnormal spending habits, then chances are
your cost of living would have increased
faster than the headline figures
because niche products and services
and markets in smaller economic centers normally suffer more
during periods of high inflation.
Now, somewhere where we can see this
actually represented in the figures is Europe
because Europe is home to a lot of countries
with the majority of them using the same currency, the Euro.
France has had a reported year-on-year inflation rate
of 6.2%, which is still much higher
than the European Central Bank's target inflation rate of 2%
but it's much lower than a country like Latvia
with an inflation rate of 22%
despite using the same currency.
So how is one country using the same currency
experiencing inflation almost four times higher
than another country?
Well, there are the obvious issues.
Latvia is much closer geographically to Russia and Ukraine
and is therefore more heavily impacted
by disruptions in the region.
Latvia is closer to the now shutoff
industrial centers of Russia
than it is to most of the European Union.
So it naturally did more business with Russia
and also lost a lot more due to trade sanctions.
But there is more to it.
Inflation in France is measured differently
to inflation in Latvia.
Latvia is a much poorer country than France
and poorer country households
naturally spend a larger portion of their income
on the bear essentials like food and energy.
Whereas in rich countries, these items normally only take up
a small share of household income.
This means the consumer price index in Latvia
will be more heavily weighted
with things like food and energy.
At the moment, food and energy are the markets
most impacted by global events
and because these markets are so heavily represented
in Latvia's CPI, its inflation rate is higher.
If France's inflation was measured
using Latvia's consumer price index
its inflation rate would be a fair bit higher,
and if Latvia's inflation rate was measured
using France's consumer price index,
it would be a fair bit lower.
That doesn't mean that these calculations are flawed.
Quite the opposite actually.
We measure inflation to get an idea
of what is going on in the economy
and the people within a nation are what drives that economy.
So it's important that the consumer price index
is indicative of the spending habits of people
within that economy.
If white flags and poodle haircuts
are not what most households in Latvia
are spending their money on,
their economy shouldn't be measured
on those goods and services.
It is still important to remember this detail though
because it means that direct comparisons of inflation rates
can often be misleading especially between countries
with very different socioeconomic conditions.
But beyond that disclaimer, no matter what metrics you use
France is still running a lower rate of inflation
than other EU countries,
and you might have noticed on this list
a European country that is running an inflation rate
half that of even France.
So what is Switzerland doing right?
Switzerland is a very wealthy country.
Its citizens are amongst the wealthiest in the world
with only Australia and a select group of micro nations
giving it any real competition.
Wealthier citizens are going to make for an economy
that is less susceptible to inflation
because richer people are going to spend
a lower portion of their income on essentials
and a higher portion on luxuries
that they can choose to go without
if they become too expensive.
Restaurant meals are a great example of this.
Wealthier households are going to spend more
on restaurant meals than households
that are struggling to make ends meet.
If inflation is very high
those wealthy households might just choose to eat at home,
which will reduce demand for restaurant meals
and force restaurants to reduce their prices
by running sales to attract fickle customers
back to their tables.
Poorer households can't choose
to stop spending money at restaurants
because they likely weren't doing it to begin with.
And they also can't stop consuming
bare essentials like food because, well
they're bare essentials.
Without food you starve
so people are willing to spend whatever they must
to feed their families.
But there is still more to the Swiss story.
One thing that a lot of other outlets have been focusing on
is the relative stability of the Swiss Franc.
When compared to the US Dollar
it is one of the few countries in the world
that has not lost significant value this year.
The main reason for this relative strength
is that the Swiss Franc is heavily backed
by large reserves of gold, financial assets,
real estate and bonds from other governments.
This means that the Swiss Central Bank
can ensure the currency stability in foreign exchange market
because if the price of the currency gets too low
they can sell their assets in exchange for Swiss Francs.
And if the value of the currency gets too high
they can trade their Francs for more assets.
People who have watched my videos on countries like China
might remember that this sounds like a currency peg
but it is a little bit different in Switzerland's case
because they do not target a specific price.
They let the market determine the price for the most part
but they will intervene if they feel it is necessary.
Now, this explanation is not wrong.
It just omits some very important details because remember,
inflation is not the same thing
as money becoming less valuable.
The real reason that Switzerland
is riding out the global inflation storm so well
is ironically because it does a lot of trade.
Switzerland is a country heavily dependent on trade,
both imports and exports.
The total value of all trade
relative to the size of an economy
is something that economists call trade intensity.
Switzerland imports about 300 billion US Dollars
worth of goods and services every year
and exports about the same amount.
That works out to a per capita import and export value
of around $35,000 per citizen.
For reference, the USA exports around $4,000 per capita
and imports just under $7,000 per capita.
This does get a bit confusing
because international trade has normally been seen
as one of the big contributing factors causing inflation
with global supply chains and trade tensions
having all manner of problems around the world.
But as with most things in economics
it's important not to overgeneralize.
Most of Switzerland's imports
come from its neighboring countries in the EU and the UK.
These trade routes are extremely direct
with trains and trucks that won't suffer from closed ports
or delays at distribution centers.
Switzerland is also able to leverage
their strong currency to buy these imports
at a 10% discount from what they were 12 months ago.
In a country like the USA
where total imports account for a relatively low share
of total output, this wouldn't make a huge difference.
But remember, the average Swiss citizen is importing
$35,000 worth of stuff every year,
and if they were getting that stuff from Euro countries
using their Francs, they would be $3,500 better off
for no other reason than their strong currency,
which offsets a large part of any inflation
that they were subject to.
On the flip side, most of Switzerland's exports
are very high end goods and services
with significant value add
that aren't going to be as heavily impacted
by global unrest as large scale low margin commodities.
There are also smaller factors
like the country's use of hydroelectric power
for majority of its energy making it less susceptible
to the oil and gas price volatilities
a lot of other countries in Europe are suffering from.
So is there anything to learn from Switzerland?
Unfortunately, not really. No.
Apart from maybe seeing the benefits of investing
in highly value adding industries and renewable resources,
Switzerland has actually historically been struggling
with deflation, which is slowing growth
in an otherwise very prosperous country.
It's important to remember that economic slowdowns
normally bring with them low inflation,
and a lot of economies
that aren't having inflation problems right now
are only in that position
because they have larger economic issues
that are crippling consumer demand.
You can go and watch our video on Japan
or why China is not going to collapse
to find out why deflation can be just as bad
if not worse than inflation.
These problems aren't as present in Switzerland
but most economies will still have to forego
significant growth to get themselves into a position
as stable as Switzerland's, which is a fine trade to make
when all of their citizens have a high standard of living
but a harder trade off to make when sustained growth
could be the key to lifting millions of people
out of poverty.
Beyond that, I'm sure most economies
would love to be Switzerland in the same way
that I would love to be a multimillionaire.
It's not feasible to point
to one of the wealthiest countries in the world
and ask other economies why they can't just do
what Switzerland is doing.
But what we can learn from Switzerland
is where it sits on the economics explained
national leaderboard.
Starting as always with size,
Switzerland has a GDP of 813 billion US Dollars,
which makes it the 20th largest economy in the world
and it gets a 7 out of 10.
That might not sound that impressive,
but GDP per capita is amongst the highest in the world
at $93,457 per citizen.
For reference, the USA,
which is itself a remarkably productive country,
has a GDP per capita of just $69,288.
This impressive figure
is due to the highly technical industries
that Swiss residents work in.
I have used the process of turning raw steel
into wrist watches countless times on this channel
as the perfect example of adding value in an economy,
and nobody does this better than the Swiss.
It gets a 10 out of 10.
Stability and confidence is also very high.
Though its days of banking for the world's secretive elite
are behind it, it is still the go-to destination
for more above board financial operations.
Because of its world renowned neutrality and stability
it gets a 10 out of 10.
Growth has been strong relative to its European neighbors,
but they haven't exactly been setting the bar
extremely high.
The perhaps overly careful governing system of the country
favors slow stable growth
and that's what they've been having.
It gets a 7 out of 10.
Finally, industry.
While it's not massive
the industries that they do have are world-leading.
If you want the best bankers, you get a Swiss banker.
If you want the best chocolate, you get Swiss chocolate.
And if you want the best watches, you get Swiss watches.
Swiss industry gets an 8 out of 10.
Altogether that gives the economy of Switzerland
an average score of 8.4 out of 10
putting it into third place on the leaderboard.
Thanks for watching mate. Bye.