Inflation is the bogeyman that others use to frighten you into making bad investments. It’s about as likely to return as the gold standard.
Year after year, the experts (or nearly all of them) tell you that the central banks are “printing’ (creating) so much money that it’s only a matter of time before the prices of goods and services are inflated by it… explosively.
Inconveniently, that just doesn’t seem to happen. Last year, despite the strongest growth in the world economy for nearly three decades, inflation only reached 2.7 per cent in the US, 1.8 per cent in the Eurozone, 1.3 per cent in the UK and 0.1 per cent in Japan.
Even allowing for official manipulation so the statistics understate the reality (which they undoubtedly do), these are very low figures. And economists don’t forecast much change over the next year or two.
The inflationists are convinced that inflation must return because it always has. True. But investors could lose a lot of money waiting for it. The inflationists choose to forget that there was no inflation in the world economy for most of the 19th century, and for a long period in the 20th. More recently, the world’s second biggest economy – Japan — has not experienced inflation for more than a decade, despite massive monetary and fiscal stimulation.
Money creation only causes inflation if it boosts demand for goods and services greater than available supply. In the world as a whole, that has not been happening for years, and there is no sign that it’s about to happen.
Demand growth has been dampened by a range of factors including the collapse in purchases of expensive weaponry since the disappearance of the Soviet-US arms race, fiscal restraints in Europe and Japan, low investment in capital-intensive infrastructure and heavy industry, and very high savings rates among the newly-wealthy middle classes of Asia.
More importantly, supply of goods and services has been growing strongly. Globalization — brought about by falling trade barriers, the collapse of communism, the emergence of English as the universal language, and the arrival of infotech — has given birth to a new industrial revolution in the emerging economies.
Abundant supply has generated intense competition – an environment in which it’s difficult, if not impossible, for producers to raise their prices.
Until recently this was limited to tangible products such as clothing, cars and computers. Only the low-skilled in the advanced economies felt the pain of competition from workers in Asia, Eastern Europe and Latin America. Earning the equivalent of a few dollars a day, they have been robbing American workers of growth in their real incomes, and West European workers of their jobs.
Now it’s the turn of the higher-skilled, including managers, who are starting to feel the pain of competition from the East and the South.
By Martin Spring in On Target, a private newsletter on global strateg