Dr Philippa Malmgren, economist guru to world leaders, opinion makers and the international business world, confirms that global forces are leading to separatist movements from Catalonia to California. Malmgren explains there are two economic forces at play in the world today.
This is controversial because most say deflation is the only threat but Malmgren says efforts to deal with the deflation problem are already creating signs of inflation. The debt problem is real and bears down on individuals, nations and everyone in between. The low or no job situation kills faith in the future and compels policy makers to do their utmost to stimulate the return of inflation. Malmgren’s new book “Signals” is sounding the alarm on inflation; she is predicting it, explaining world banks are doing everything orthodox and unorthodox to create inflation by keeping interest rates low,thereby encouraging the cost of living to go up. Inflation, she reminds us is a form of default, it is one way governments can deal with their overwhelming debt problems. But the combination of low income and rising costs is noxious and makes the public angry; Malmgren believes anger and hidden inflationare the most important economic forcesin society today. Central banks say there isn’t any inflation and yet the main topic of conversation around the world is the rising cost of rent, food, rail fares and other life essentials. There is less cereal in the box and everything from candy bars to the size of flats is getting smallerbut consumers are being charged the same price,the price per unit is rising.
Society is a slave to the debt problem. Apparently when Lehman Brothers collapsed in 2008, policymakers realized that nearly every bank in the world was covertly illiquid if not insolvent. Radical action was required. The Americans announced the “Troubled Asset Relief Program (TARP)”which was an injection of capital into the markets. Its size was unprecedented and larger than any wartime budget but it was not enough, the Federal Reserve and the European Central Bank had to cut interest rates to almost zero. The banking system may have been saved but still there is an epic debt problem.This outrages people because it means there is not enough money to fund the Health Services or schools or to finance security, yet the debt cannot be paid down without unacceptable political pain.
Malmgren says there are a limited number of ways to default, suggesting three simple options (SO) to solve Debt, which are unlikely to work. SO 1: not to pay it back, Iceland and Argentina style, not a very western approach. SO 2: Defer payment over sovereignty, Greek style pay less later. SO 3: The leader of a nation (Prime Minister) can say “we made promises we cannot fulfil” and deliver less for health services, state schools and security but tax citizens more. This is commonly known as austerity, a favourite technique of George Osborne’s. All the above are vote losers so option 4, inflation, comes into play, whereby the governments borrows from let’s say China, but this money buys less for the consumer because of the rise in prices. Everybody likes inflation at the beginning,house prices rise and the stock market goes up. But there are social consequences to choosing inflation Malmgren says “Inflation is a tax, an invisible expropriation of earnings. The Bank of England says there is no inflation and yet rents are rising, costs are rising. In the UK use of food banks is at a record high, the poor are already hurting even before real inflation kicks in. The rich can survive inflation as they have assets that all rise in value. The reality is there is a gap between what officials at the Bank of England say and what we citizens are experiencing.”
Malmgren believes China has understood the insidious threat of inflation, they used to invest their profits into Treasuries and European Sovereign Debt to avoid inflation in China, effectively this pushed down Western interest rates and let the West grow businesses and start-ups, consumerism rose, which meant more profits returned to China creating a perfect circle of finance that benefited both sides.But, if the West is choosing inflation it makes no sense to buy bonds, now China wants inflation protected assets ininfrastructure. China would like to finance HS2, the high-speed railway planned to link London, Birmingham and beyond.It’s why they like investing in British airports.
The Federal Reserve and the Bank of England data report no inflation, yet record amounts of cash are being poured into the system with zero interest rates. Malmgren is seeing inflation in all emerging markets, noting rents in Beijing and Shenzen are rising 100% per annum. Pork prices are rising as much as 50% per quarter. In response to these higher costs, Chinese workers ask for wage hikes (wages have quintupled in five years), as a result manufacturing in China is becoming less competitive.
The Chinese leadership know that if they cannot feed their population for the right price, the people will question their leadership. This explains China’s focus on the South China Sea whichcontains 10% of the world’s fish supply. The new Chinese military installation at Fiery Cross could be seen as protecting the Chinese protein supply as a result of inflation. Similarly Russians are now spending 50% of their income on food, the price of a Norwegian salmon is more than a barrel of oil. Malmgren points out that when Medvedev says the artic is the Mecca of resources, it is fish not minerals he is talking about, it is not surprising when the Russians show up in the Artic or the Baltic.
These hunger games haveincreased the dangerous near misses betweenChinese and US spy planes, to the extent that in December 2015 Obama and Jinping signed a deal prohibiting military pilots on both sides from making obscene hand gestures at each other. For this to be necessary it means the planes are getting within 7 metres of each other, Malmgren worries the public do not understand how close conflict with China is becoming or that it is driven by economic forces.
Malmgren believes what comes out of the conflict between deflation and inflation is social protest, in the West it emerges through the ballot box (Brexit), in emerging markets the public take to the street (the Arab Spring). On the other hand she says innovation also emerges from these same forces.
Signals argues that data is backward looking butMalmgren ends on a positive note. Conflicts and bad outcomes, where the few get everything and the many get nothing, can be avoided. Innovation is required in the economy, in politics, in policy. Malmgren says people are building tomorrow’s economy today, already people with practical skills are now being paid more than white collar workers in finance; mining engineers graduating now have higher starting salaries worldwide than MBA graduates from Harvard. That’s a signal.