Finance Monthly - January 2022

and financial assets will rise. (Conversely, that’s why everyone predicts a stock market crash when rates (the price of money) rise!) But long-term Financial Asset Inflation since 2009 has created a whole series of massively destabilising consequences. The rich have become phenomenally richer – buoyed by soaring stock prices. Generally, they are exactly the same people saying governments are borrowing too much, taxing them too much and it’s time to cut spending! Expectations that markets will only keep going higher have sucked in legions of retail investors convinced they’ll get rich (only if they stay lucky). The results of chronic inequality, political blindness and insane financial optimism make for a hopeless unbalanced and unfocused economy. The real value of the global economy is not the market cap of an electric car company worth trillions, but the number of electric cars being produced and sold. (These are very different metrics – one is perceived future value, the other real value.) Inflation in the real economy is not cause and effect. It’s a constantly evolving perception and expectations led threat. It changes as the votes with the markets change and the behaviours of economic participants change. The supply chain crisis as the global economy reopened triggered a host of consequences around the globe. What’s happened has been complex and spawned a host of unforeseen knock-on effects. The coronavirus and successive lockdowns are still throwing new shocks into the system – as a result, the system is becoming increasingly chaotic and impossible to predict as the threat board keeps changing. This is roughly how it worked: Economies around the globe shuttered themselves through lockdowns and working from home. Goods become scarce – from construction lumber to microchips at both micro and macro level, from local shortages to national level. Prices of scarce goods rocket – often temporarily till new supply leaven shortages. However, workers perceive higher prices and demand higher wages to compensate – triggering wage inflation. Prices become elastic to the upside and sticky to adjust downwards. Companies raise margins and prices to meet wage demands, fuelling further wage demands and declining demand. The intricate balances between demand and supply become increasingly chaotic, and more so when new COVID lockdowns raise new supply chain threats. Throw in an energy inflation spike and you create a recipe for disaster. The key thing is not that inflation is simply due to the consequences of too-low interest rates (the monetary phenomenon) or rising government indebtedness (pumping money into the economy) but is due to the expectations of crowds towards perceptions of rising costs. In a crisis, human behaviour tends to become increasingly difficult and fractious to predict. The unpredictable behaviour of crowds makes Central Bankers policy choices fraught. Traditional inflation responses like austerity, raising taxes, tighter monetary policy, are as likely to cause market instability and generate increased expectations to push inflation as to ease it. The time to cut liquidity, the amount of money sloshing around the financial system was a long time ago. That money – that’s fuelled financial asset inflation – is now pouring into the real economy in terms of buying real assets like property, pushing up real inflation. Complex eh? But don’t panic… yet. Bill Blain is the author of Blain’s Morning Porridge and strategist at Shard Capital. “What a vast number of market participants don’t get is inflation doesn’t follow rules – it follows sentiment.” Finance Monthly. Bus i ne s s & Economy 33