ISN'T THE 1970S; ERGO, INFLATION IS NOT A WORRY.
that sentence freighted with interest, and not only because we wrote
it. What's intriguing, as well, is that it contains two clauses, one
of which is indisputably true, the other as clearly a non sequitur
as you could ever hope to come across.
also striking about the sentence is that it offers a striking
example of how economists think (or, at least, make a pretense of
doing so) and why their perceptions are often so alien to what's
actually going on.
record of the brilliant soul who discovered this isn't the 1970s, so
we can't offer our congratulations. Too bad, really, because it
matches in perspicuity the venerable observation that when people
are out of work, unemployment results.
the calendrically challenged or the hopelessly infected with
incurable nostalgia, no one would likely take exception to the
remarkable insight this is not the '70s. Somehow, though, it doesn't
ineluctably follow that because this is 2008 and not, say, 1978, we
needn't shiver before the specter of inflation.
fostering that notion, its numerous proponents, whether leaning left
or right philosophically, triumphantly cite as proof labor's present
emasculated state compared with the prowess it possessed three
decades ago to score huge wage increases that provided tinder for
the inflationary flames.
that globalization in particular has exerted enormous competitive
pressure on working stiffs from their counterparts who labor for a
pittance in faraway lands, compelling once truculent unions to ask
rather than demand at the bargaining table. Nor that, in
consequence, paychecks are not, as in the '70s, spiraling wildly
except in standard economic texts, is it written that inflation
comes in only one flavor? That without exploding wage costs, what
naifs like us call inflation doesn't meet the definition of
happens, our trusty dictionary, in fact, defines inflation as: "A
persistent increase in the level of consumer prices or a persistent
decline in the purchasing power of money, caused by an increase in
available currency and credit beyond the proportion of goods and
that dictionaries are the handiwork of people who are exacting about
words and their meanings and not by professional economists, for
whom even their native tongue is always a second language. But that
quote perching in the paragraph above is not a bad description of
what's happening out there in the real world, in contrast to the
fantasy land where denizens of academe, Wall Street and Washington
cavort and gambol.
forgo once again listing the various and sundry conjuring tricks
used to make inflation officially invisible and content ourselves
with brief notice of a few of the more egregious ones. Like, of
course, banishing oil prices from the anointed inflation measure --
the sacred mythical core -- because they're too "volatile."
means wide and frequent changes up and down. The price of crude has
risen for six and a half years in a row, from $20 a barrel to $135
barrel, and during this extended span it experienced only one rather
brief and relatively modest decline worthy of mention.
prices -- which you may have noticed have been on a tear for quite a
spell now and, according to the latest consumer-price index,
rocketed upward in May alone -- are also conveniently excluded by
that purposively myopic crew from their pristine reckonings of
inflation because of volatility.
Add to the
more serious sins of the no-inflationiks a tendency to overlook or
shrug off the inexorably mounting cost of health care. Analyst
Shiria Sum of Goldman Sachs, however, in a commentary released on
Friday makes no bones about the painful bite rising health-care
costs are taking out of the increasingly pinched consumer.
month, medical services were up an unhealthy 4.7% over the same
month a year earlier. Moreover, Sum points out, anyone unlucky
enough to have to check into a hospital had to fork over as much as
8.3% more than a year ago. And together with prescription drugs,
hospital services account for nearly half John and Jane Q.'s medical
the consensus among any number of economic wise men who are never in
doubt and rarely right is that there is no inflation. And, on
reflection, we're forced to concede that maybe there isn't -- unless
you're one of those silly types who insist on driving, eating or
DENIAL WILL GET YOU ONLY so far. That's true for inflation
(even Ben Bernanke, of all people, is turning a bit green these days
at the mere mention of the word). It's true of the economy at large
(even President Bush seems to have vaguely sensed that the economy
isn't what he cracked it up to be). And, as last week made
emphatically clear, denial -- much less delusion -- just won't cut
it when you're confronted by a big bad bear breathing fire from its
flaring nostrils and nary a tree in sight to climb.
been muttering aloud it seems like forever, the recession far from
being over hasn't really gotten up a head of steam yet. The credit
crunch, crush, crisis -- whichever you prefer -- is still very much
with us and, by whatever name, doesn't give the slightest indication
of packing it in. Very much the contrary, as the fresh drubbing
administered to the banks, brokers and other assorted and often
sordid financial outfits strongly suggests.
at least two decades has been what made our world go 'round, and
suddenly somebody pulled the plug and it was gone. And gone, too,
are the fabulous bubbles and booms that it so generously fed,
leaving a horrible mess that we're nowhere near mopping up.
stock market is belatedly waking up to is that the much-heralded and
more fervently hoped-for second-half recovery isn't going to happen.
That housing may have another ugly, maybe longer decline ahead of it
before it's close to a bottom. That unemployment, despite all the
gimmickry used to disguise the real numbers, will continue its
doleful push higher.
And as if
all that weren't enough to make you hop the next shuttle to the
moon, comes now S. Dewey Keesler to warn that "the global bear
market in equities" triggered by our very own subprime credit
mess "is now entering its next phase." A phase, he thinks,
that will see the emerging markets transformed into submerging
markets, an unwelcome change that will encompass the so-called BRIC
quartet -- Brazil, Russia, India and China -- as well a full
complement of the smaller fry.
his intimates call him, is an extraordinarily bright and low-key
chap, who has under his belt about 25 or so enormously successful
years as a global investor. He was a founding partner back in 1986
of Oechsle International Advisors, which, as its moniker subtly
hints, invested abroad, primarily for big institutions, including
the endowment funds of top-notch (read: rich) universities. He
eventually left to form his own shop, Boston-based SDK Capital.
markets are an accident no longer waiting to happen but very much in
progress, he says, and while the severity of the further declines
vary (Shanghai, for example, already down 50% from its peak, still
has a long way down to go), they're all vulnerable. In the months
ahead, he warns, "the concept of global economic decoupling
will be thoroughly exposed as a naive fantasy." And we say amen
misguided monetary policies that tied the developing countries'
currencies to the U.S. dollar and prevented them from controlling
their interest rates. Thanks to the Fed's serial rate slashing in
its effort to stave off a cataclysmic credit collapse, inflationary
pressures were mightily increased in the developing world. Negative
real interest rates and burgeoning money supply, Dee cautions, are
destined to stoke overheated economies and kite inflation still
matters worse -- which is what governments universally do when they
find themselves in a pickle -- efforts to keep the masses calm in
the face of rapidly rising food and energy prices have proved costly
and counterproductive, yielding shortages in gasoline, diesel fuel
and food (so what else is new?). This approach, Dee reports, is
being pretty much abandoned, which, in the short run, is sure to
mean more inflation.
way out for developing nations, he believes, but to adopt more
stringent monetary policies, "which means higher interest rates
and stronger currencies" and, inevitably, a sharp economic
who have been counting on more of the vigorous earnings growth that
attracted them to emerging markets in the first place are in for a
very big disappointment. Such expectations, Dee declares, "will
be crushed." The great unwinding of emerging markets has just
begun, he avers, "with much carnage still forthcoming."
financial markets in developing countries the vicious cycle he sees
unfolding will bring pain aplenty issuing from lower multiples on
lower earnings. As we intimated, Dee knows foreign markets, and
especially the emerging ones, inside out, and he has come up with
more than his share of winners to prove it. We haven't the slightest
hesitation in urging you to pay close heed to his forebodings.
add that given the big chunk of U.S. corporate profits that flows in
from the rest of the world, the prospect of a global shakeout
doesn't exactly dissipate our own, more parochial forebodings about
the market back here at home.