27 Sept 2022

Money Express with Jill Kerby - Inflation Friend or Foe

Once upon a time, not that long ago, the worst thing from any country’s financial perspective was too much price inflation: the higher the cost of goods and services, the more pressure workers and unions put on employers for higher wages.

Once upon a time, not that long ago, the worst thing from any country’s financial perspective was too much price inflation: the higher the cost of goods and services, the more pressure workers and unions put on employers for higher wages.

Out of control price inflation in the 1970s and ‘80s (caused by too much money printing, overspending and the oil crisis) resulted eventually in the British and American governments confronting and breaking the strangling power of the unions; nationalising state industries; deregulating financial markets; lowering some taxes (and then raising them) and pushing interest rates up and up to force inefficient, bankrupt companies and industries to go bankrupt and efficient ones to take their places.

It helped a great deal that the ending of this great period of inflation also coincided with the coming on stream of great new Alaskan and North Sea oil finds.

The impact of high price inflation eventually forces companies to keep raising their prices to meet the cost of parts and supplies and the endless rounds of wage increase demands from workers and their unions in order that their standard of living don’t collapse.

Some companies meet those demands by cost controls, then by cutting margins, then letting some workers go and eventually by closing down. This is what happened in the late 1970s and 80s here (accelerated by the huge surge in energy costs) and the state also running out of money to maintain its services.

Inflation lost its power by the late 1980s here but earlier in the US and UK and lay nearly dormant for over 20 years – mainly due to technology advances and of course, the surge of cheap new goods from countries no longer held behind their respective iron curtains. (Even India, the world’s largest democracy abandoned its mad socialist, isolationist policies and opened up trade to the world.)

When it was raging, price inflation had a terrible impact. The same amount of money in your pocket was unable to pay for the same amount of goods and services because prices kept rising. People living on fixed incomes and their savings saw their standard of living erode very quickly, though it must be said that anyone with debt, which stayed at the same level, also saw it erode as their incomes rose. People who had fixed interest debts and kept their jobs benefited the most from those mad inflationary years.

And that’s what massively indebted governments and the central banks hope to achieve again if they can manipulate up price inflation a cheaper, quicker way to pay off their debts to hapless lenders.

The great economic crash of 2008 exposed the historic levels of debt carried by countries, corporations and citizens. Trillions have been printed to avoid the dramatic, painful correction that would have come from widespread bankruptcy, debt writedowns and write offs.

The inflated money supply has mainly stayed with the financial sector and bankrupt sovereign countries, though the cost is now being transferred directly to taxpayers who have been hit by the collape of their wealth and the devaluation of their currencies.

Some of the money has been used by privileged insiders (like great corporations and moneybrokers) to pump up world stocks markets that the US government considers a barometer of wealth and stability, but also ‘real’ assets and commodities like oil, gas, foodstuffs, agri-land and precious metals - real money).

What hasn’t happened sufficiently is the disappearance of debt, even though the best commentators call price inflation a hidden tax and a destroyer of savings and capital.

This year, the central bankers seem to be singing off the same hymn sheet: slowing economies and recessions usually keep prices down, but in order to reduce debt (and stimulate growth) they need to cause price inflation in the region of at least 5%. At this level, they say it will reduce the cost to debtors (and themselves) of repaying huge loans, give much needed profit boosts to producers and retailers (at least in the early stage) and incentivise companies to hire more workers. Rising prices, the theory goes, also discourage savings and encourage us to buy stuff before prices go up again.

Of course this new, virtuous circle only lasts until the price of raw materials that feed into everything start going up and workers start demanding higher wages because they can afford to buy groceries or pay the rent. It is just before this tipping point that the central banks hope a genuine recovery momentum will be in place, after which they say they will ease up on the inflation creation.

Serious economists - the people who believe that economic growth only happens when surplus earnings are saved and invested (as capital) in genuine, productive and profitable activities - don’t think ‘moderate’ inflation intentionally created by central bankers and politicians can be controlled. Instead, given these past five years of massive money creation at levels never seen before, with very poor results, they think there is a greater chance of out-of-control inflation. (They note that the US and UK, for example, are now carrying greater levels of debt than they did after the devastating cost of World War II!) Is there anything we can do to anticipate and mitigate higher than expected inflation?

Are there things we can do to protect our savings, income or assets? Are there ways to invest and benefit from higher price inflation? Next week, I’ll pass on the practical inflation suggestions from experts like Jeff Clark of Casey Research, Mark Tenwick of IFG Corporate Pensons, Bill Bonner of The Daily Reckoning, Irish commentators Mark O’Byrne of Goldcore and Eddie Hobbs of FDM.

Better safe than sorry.

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