Who is Beating Inflation?

Due to a consequence of mistakes in fiscal and monetary policies, inflation in 2022 has jumped to levels not seen in decades in the western world. The good news is, US inflation now seems to be heading back down to 3%, the UK has broken through the 8% barrier, while Europe is still hovering around 5.5%.

As the US always leads in most things, one should expect both the UK and the Euro area inflation to slowly trend back down to the ranges that policy makers like by year-end. Therefore, two questions beckon. Have we beaten inflation? And if so, who beat inflation?

The answer to the first question is that we need to see a few more readings to be sure that inflation has been tamed.

The answer to the second question is more interesting. We need to look at the causes of inflation. In the last three years, the world has witnessed unprecedented disruption due to the war in Ukraine, and the effects of Covid-19 which forced governments around the world to lock people at home and pay supplemental income to those who lost their jobs or simply couldn’t ‘work from home’. Governments that prevented people from working had to take on the responsibility of paying them, and this was done both indirectly, by helping companies and directly, individuals.

The problem was that governments made a dosage mistake. Most people in the developed world, especially the relatively affluent young professionals, tend to spend an important portion of their income on entertainment, eating out, and travel. Due to long lockdown periods, the supplemental income that people received, that was not spent, increased savings. These savings were initially invested in stock markets, cryptocurrencies, watches and the like. But then, as the world reopened, pent up demand for travel, restaurants, and entertainment resulted in a flood of money into a plethora of services, that were themselves facing supply shortages in every aspect imaginable while they ramped up their capacities. Scarcity of service staff at restaurants, handlers at airports and the inability to refill old positions due to people moving for various reasons during the long lockdown period lead to higher costs in the aftermath of the lockdowns. And to compound policy errors, as soon as he got elected, Biden decided to give more money to more people in an unprecedented stimulus package while the effects of Covid-19 were subsiding, in a move that most economists thought was a colossal fiscal policy error.

The result: low supply of goods and services, high savings, new stimulus, and pent-up demand, high inflation. Prices moved up, and if history is an indicator, they will not really come down. There has been a parallel shift in the curve but inflation is not a measure of price levels, it is a measure of acceleration. Just like getting sucked in to your seat on a plane during take-off at 250MPH but not feeling anything when it stabilises at 550MPH, what is felt is acceleration, not the static higher levels of speed.

Monetary authorities, who were asleep at the wheel when inflation started moving up and were still priming the economy with low rates and quantitative easing (remember QE? Simply put, buying bonds and increasing money supply), had to catch up rapidly and deliver nearly constant monthly interest rate increases that have brought short-term rates around the world from around zero to the 4-6% band.

The question to ponder is, was it higher rates that was taming inflation? If inflation went up because of a supply and demand mismatch that has since subsided, perhaps inflation too has now stabilised after moving the prices higher. This would mean that this stability has less to do with higher rates and is more a result of the absence of the reasons that brought it up in the first place. Or alternatively, we have entered a price-wage spiral reminiscent of the ‘70s that will take much longer to cure.

The next few months will tell. In the meantime, medium-term low risk bonds could be a bargain in either scenario.

When Too Much Thrift is No Good

What is the most common sin of elected officials? You guessed it. Taking advantage of their position to gain private benefits. The London political scene has been up in arms with two ‘scandals’ in the past months, both of them probably more political than legal. The first was David Cameron’s lobbying for a failed financial group, long after his full exit from public life, but ostensibly using connections he gained while he was prime minister. The latest stems from Boris Johnson’s spending a very modest amount of money to upgrade his living quarters at 10 Downing Street. The allegation is not that he used taxpayer money improperly, but rather that the refurbishment was paid by friends, in contravention of election rules. Where is the honour of the office, for the man responsible for the security and health of 60m Britons? Ah, that is only for the Royals, whose closest life and death decisions are whether to kill or spare the next goose at Balmoral…

This case is similar, if simpler, to Benjamin Netanyahu’s legal travails in several criminal cases opened against him. The cases range from receiving cigars from businessmen, to asking for Champagne, to requesting good (fair?) media treatment in a country where, much like the US, the media is in the hands of the left-wing liberals.

It seems that there is a much cheaper, more efficient, and fair way to deal with these ‘mini-sleaze’ issues: afford prime ministers compensation and benefits that reflect the importance and honour of their office, not because they should gain a luxurious lifestyle at the expense of the taxpayers, but much more pragmatically because if they can afford to pay for furniture and cigars, they won’t have to ask favours, which have a tendency to be called at some point.

Countries like the United States, but even revolutionary France, and of course Putin’s Russia, treat their senior leaders much more lavishly. They don’t need to spend their pocket money in doing up their living quarters, as this is done at the expense of the State. Just like the queen, the President has attendants that take care of his every need, including helping him to dress in the morning! Contrast this to the British prime minister who has to cook his own dinner, or to the Israeli prime minister who has to rent an El Al plane to travel for State trips (a new plane has finally been ordered), and has to sit on a public beach if he wants to go on vacation (unless he has his own funds of course).

And when things go wrong and these leaders face legal action? They have to spend their own money and time to defend them while in office.  Mr. Netanyahu is responsible for the safety of nearly 10m Israelis who live under the shadow of missiles, terrorism, cyber threats, nuclear bombs, and more recently, Covid of course, but he has to spend incredible time, concentration, and resources in defending himself in court. Contrast this with the United States, where the president can only be indicted for high crimes and treason, and even that is a political exercise which takes a couple of months, not many years, as we have recently witnessed. Or consider the French system, where sitting presidents cannot be indicted for crimes until their term is up, as it happened recently with Chirac and Sarkozy.

Our leaders’ time and attention are priceless. One hour flight time of an F-15 can pay for a lifetime of cigars, champagne and sofas. Let’s pay our leaders fairly and generously and then expect full attention and no conflicts of interest.