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Soapbox: Inflation – Who do you believe?

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We’re far away from Weimar Germany but perhaps closer to 1989’s Argentina than we think.

In Germany in 1923 hyperinflation took off; a loaf of bread that cost some 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923.

In 1989 in Argentina inflation hit 2,000% a year. As you did your weekly shop on Avenida Florida you found store assistants ahead of you busily stamping higher-priced stickers over the existing price.

Annual inflation today in Argentina is officially almost 50% but few believe that official figure. At street level, it feels very different, partly because Argentines have lost confidence in their paper currency, the Peso.

Argentina is the world’s biggest exporter of soymeal – crushed soybeans largely used as animal feed. But rather than export their soymeal Argentine farmers are holding back their beans, selling just limited amounts to cover on-going costs; the beans are being held onto as a hedge against probable future declines in the value of the Peso. High inflation and a collapse in the purchasing power of a currency usually go hand-in-hand.

Officially, the annual inflation rate in the US for the 12 months ending in March 2021 was 2.6%, according to the Consumer Price Index, which is based on a market basket of consumer goods and services” according to the US Bureau of Labor Statistics. The US inflation rate from January 2000 to January 2010 was 26.63%. In the UK, the official inflation rate is also based on a basket of goods, the Consumer Prices Index; this rose we are told by 1% in the 12 months to the end of March 2021.

The relatively languid official data about the current level of inflation is disputed. The Sage of Omaha – Warren Buffett – told shareholders of his Berkshire Hathaway company at the start of May “we are seeing very substantial inflation… We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up”.

Manufacturers of core commodities in the Eurozone that expect to put up prices in the next 3 months: Source, European        Commission.


That wholesale price inflation will inevitably feed into higher consumer prices. Bloomberg’s commodity index is up by 17% so far this year and has reached record highs. The futures price of crude palm oil, to take one basic agricultural commodity, used in everything from lipstick to processed foods to biodiesel, has gone up more than 100% in the past 12 months. Goldman Sachs said at the end of April that it sees commodities rising by another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.

Cost-push and demand-pull

Governments have a vested interest in balancing inflation; worried about voters, they try to maintain stable prices but also to inject a little ‘controllable’ inflation into the economy. If an economy is not running at full capacity a little bit of inflation in theory helps increase production – more money swirling around translates into more spending, which means more demand, which in turn triggers more production and greater employment. That’s the theory. The reality is that it is always a tightrope act.

The US explicitly adopted a 2% per year inflation target in 2012 but it has relaxed that recently. The International Monetary Fund (IMF) described inflation targeting as “a pragmatic response to the failure of other monetary policy regimes”. Prior to inflation targeting central banks set targets for money supply or exchange rates.

There are two basic causes of inflation – demand-pull and cost-push. Demand-pull works when consumer demand pulls prices up; cost-push happens when supply-side costs force prices higher. Some economists argue that there is a third cause – an expansion of the supply of fiat currencies, of paper money. Put these things together and we have a heady cocktail. And all three things are now going on at once.

There is cost-push: in the US the latest Institute for Supply Management (ISM) figures say that factories’ waiting time for production materials reached 79 days in April, the longest in records dating back to 1987. US purchasing managers last November said there were just eight materials they were struggling to obtain. Today it’s 24. According to one assessment the price of houses in 25 countries rose by an average 5% in the last 12 months, “the quickest in over a decade”.

Then there is demand-pull. In the US wages in the private sector in the first quarter of this year rose by the most in 18 years. The US National Federation of Independent Business reported in a March survey that about 28% of small businesses put up salaries – the biggest cost for businesses – and started offering signing-on bonuses just to find suitably qualified applicants. More generous welfare benefits and (in the US) the pandemic relief checks are giving workers the chance to be more selective. According to a survey published in April job vacancies were up by 22% during January-March this year in the US while the number of applicants was down by 23%, year-on-year.

And there is vast expansion of money supply. Aggregate money supply increased by $14 trillion in 2020 in the US, China, Eurozone, Japan and eight other developed economies. This exceeds the previous record increase of $8.38 trillion in 2017. “Much of the money that landed in the laps of investors [in 2020] found its way into the stock market, pushing the global value of stocks to more than $100 trillion for the first time and the average stock price for a member of the MSCI All-Country World Index to a stratospheric 31 times earnings” says Bloomberg.

How will this all end? It’s not at all clear. If inflation looks like getting out of control then central banks will have to push up interest rates, which – for now – they show no inclination towards. Not least because too much is riding on the loose money policies – financial markets would tumble and over-leveraged companies would go bust. Janet Yellen, the US Treasury Secretary, said at the start of May that she didn’t think there is going to be “an inflationary problem”. That’s a view not shared by other Americans, and it’s not borne out by the remarkable rise in the price of many basic commodities. The price of copper, for example, has doubled since its pandemic low in March 2020. The New York Fed’s monthly survey of consumer expectations – gauged by a survey of some 1,300 households – found that rental cost expectations increased for the fifth consecutive month and are now expected to rise by 9.5% over the next year.


During periods of high inflation, whether in Weimar Germany or 1989’s Argentina or today’s Venezuela people do their best to acquire physical assets. Being able to hold something real and concrete is essential when prices are spiralling – in those situations fiat currency, paper promises by government, tends to lose its meaning. Yet people still need a means of exchange to be able to buy their daily bread. At Glint we believe we offer our clients the ideal means of squaring this circle – hold a physical asset, gold, and yet be able to use that physical asset to be able to spend on the essentials. With Glint you can buy, save – and increasingly relevant perhaps – spend in gold.

Soapbox: Negative interest is no answer

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Governments have thrown just about everything at their economies since the terrible impact of lockdowns eliminated millions of jobs and slashed growth.

Their efforts – trillions in ‘stimulus’ spending, helicopter money, interest rate cuts, ‘furlough’ schemes, holidays on this and that tax – have had some hefty unintended consequences. The pace of developments has been remarkable. One of the macro-economic tools that’s been tried is cutting interest rates, and even making them negative – in other words you would have to pay a bank to deposit your money.

In February, the Bank of England (BoE) formally told the UK’s high street banks they had six months to prepare for negative rates. The possibility of negative interest rates should send shivers down everyone’s spine. This week we may learn if the BoE intends following through on its warning.

A shift into negative rates will however do little to get the economy moving again. It may produce its own distortions – and market distortions can last much longer than the policy changes that gave rise to them. There’s always a time lag.

For example, few people this time last year would have forecast that household wealth would have soared under the pandemic – yet it has. In March average US household income went up by more than 21%, the largest monthly rise since 1959. UK households that same month put £16.2 billion into their bank accounts, 3.4 times the monthly average for the year to February 2020, prior to the first UK lockdown.

In the UK, we have an extra twist. The UK Chancellor Rishi Sunak announced in July 2020 a temporary stamp duty holiday. Stamp duty is the tax levied by the UK government on residential property – on homes. Sunak cut the rate to zero for all properties sold for less than £500,000 ($693,000) until the end of March. He later extended this until the end of June this year. It’s not clear why the Chancellor chose this policy instrument in the anti-Covid/economic slump fight but its effect has been to create a “red hot” property market according to one UK mortgage adviser.


Governments lack dexterity

Demand for mortgages in the UK has become “red hot” and – the laws of supply and demand being what they are – average UK house prices went up by an astonishing 7.3% in April year-on-year. In the US, house prices rose by 16% in the past 12 months. The price of lumber – the main component in the typical US house – has risen by more than 230% since the start of the Covid-19 pandemic. UK household wealth has risen to record levels, the equivalent of £172,000 ($238,400) per person. In the US, personal incomes went up by 21.1% in March against the previous month – the highest jump since 1946.

US citizens – even those working and living abroad – have received their $1,400 Biden “stimulus check”. Some UK citizens have been paid by the government while their job is put on pause (“furloughed”).

But the hand of government is by definition clumsy. All state instruments are blunt; they’re not built to take account of individual cases. Thus the Legatum Institute, a think-tank in the UK, estimated last November that almost 700,000 people had been pushed into “poverty” in the UK as a result of the Covid-induced economic crisis. Human Rights Watch, the international NGO, said that eight million more US citizens were living in poverty in January this year than six months’ previously.

The gap between the “haves” and the “have nots” has just got bigger; the collective wealth of the more than 600 US billionaires has gone up by 36% during the pandemic. The richest 1% of Americans have added about $4.8 trillion of wealth from the end of March to the end of December 2020.


Continental lessons



We should be wary therefore of any attempt to stimulate growth by making interest rates negative. The money that would supposedly be teased out and put to productive use (into the “real” economy of making things people need to buy) will not necessarily end up there. Those who put their spare cash in banks would find themselves forced to pay for the privilege. Savers in cash are already punished by record low-interest rates; they would suffer even more punishment if rates went negative.

Nor is there any guarantee that the cash would flow into the economy; since the European Central Bank (ECB) introduced a negative deposit rate in 2014 physical cash holdings in Germany have trebled to €43.4 billion ($52 billion, £37 billion). People prefer to hold cash than pay banks, or to risk it by investing it. People have become even more wary of spending on anything but tangible assets in the wake of Covid. In the seven years since then the 19 countries within the Euro area have grown very sluggishly – peaking at 2.6% gross domestic product (GDP) growth in 2017 and as low as 1.3% in 2019 – the year before Covid-19 struck. Their example of negative interest rates does not seem to encourage growth.

Governments right now want to see their populations spending, injecting money into the economy and theoretically driving economic growth. Negative interest rates – which would have a knock-on effect on many financial products and institutions, from tracker funds to banks – are not the answer when economic growth already appears to be rebounding. The “reflation trade” has become a buzz phrase in recent weeks; crafting policy to ensure that inflation does not get out of hand is rapidly becoming the main concern for the US and others.

With interest rates so low, taxes bound to rise, prices soaring – lumber is only one example – protecting what one has is becoming daily more important. The gold price is having one of its periodic dips; but if history is any guide, then gold remains an important part of anyone’s portfolio.