Economist Martin-Fagg on inflation from a global perspective
As inflation continues to surge across the globe, Vistage Chief Research Officer Joe Galvin spoke with UK behavioral economist Roger Martin-Fagg on its larger, more lengthy implications.
Joe Galvin: The implications of inflation are affecting all of us, especially as we move into our planning and budget cycles.
Joining us today is behavioral economist Roger Martin-Fagg. Roger routinely presents his thoughts on the economy to the U.K. community. We thought that it’d be a great idea to have Roger join us and share his thoughts on inflation from a global perspective.
Roger Martin-Fagg: I feel quite strongly about the way media are reporting that inflation is due to post-COVID supply chain constraint, that it’s a blip and in 18 months, it’ll be gone. I don’t buy that. Let me explain why.
Inflation is bigger than a blip
When COVID hit, central banks across the whole world directly financed government spending. They did it by buying those treasury bills or gilts, whichever country you go to.
The total amount of funding of new money created in the last 18 months is about $19 trillion — to get the size of that, the U.S. economy is just over $20 trillion.
What’s happened is a whole America-sized fund has arrived on the planet and now is demanding goods and services. And that’s why we’ve got shortages. That’s why prices are rising.
The velocity of spending is still increasing
Now, when someone spends money, it doesn’t leave the system. It goes from their bank account to someone else’s bank account, either in the same country or in a different country. If it’s America spending, the chances are that it’s going to China.
When spending happens, the velocity of money tends to increase. And that’s what we’ve seen. The total amount of money doesn’t change.
In fact, the total amount of money is still rising. In the U.S., it’s rising by 12%. In the UK, it’s rising by 8%. In the EU, it’s rising by 8%.
Now, for stable prices — an inflation rate at around 2% — money supply needs to be growing up 5%. Not 8% or 12%.
Not only do we have this $19 trillion that’s trying to find a home, it’s being added to by the week because money supply growth is still going up, thanks to central banks.
Central banks should start selling bonds
We’ve heard that central banks are going to start tapering. That means reducing the amount of money they’re creating.
If they want to kill inflation, they’ve got to stop quantitative easing and start selling those bonds that they have into the market. And then destroying the unit of money they get in receipt.
The reason why they’re not doing that is it pushes up the long-run interest rate, which corporate investment decisions.
That’s my first point. Central banks are all behind the curve and they’re trying to say, “It’s all going to be fine.”
A demographic shift in labor
If you look at America and you look at the UK, we’ve got a demographic issue underpinning this.
I had a quick look at the U.S. demographics — over the next 10 years, they’re going be a lot more retirees than new entrants. It’s hitting the UK now.
If you look at labor supply on the pure demographics and the behavioral change and as a result of COVID, quite a lot of people have reassessed their life. Older truck drivers have said, “Being at home’s rather nice. I’m not going back to that game.”
That’s the case in the UK as well. We’ve got more retirees, fewer new employees. We’ve got shortages of people in the Western world, across Europe and the States. China’s got the demographic bite — the one child-per-family rule is hitting them now.
I think that the idea that inflation is just a blip is entirely wrong.
Poaching wars will increase wages
Companies are going to be poaching people from each other and that’s going to ramp up average wages.
I would suggest across most sectors but particularly in FinTech, IT, logistics, and warehousing. That’s where the big constraints are going to be.
Taxes won’t reduce inflation
Now, the next point that people raise to me is, “Roger, what you don’t understand is that Biden’s going to raise taxes and that’s going to depress demand.” When it actually doesn’t. It changes where demand goes.
If I’m a very high net-worth individual and my taxes gone up, I can’t afford my super yacht. But Biden then goes and tells Delaware or wherever that they can build a new interstate and the federal government will pay for it.
When taxes rise, money changes from one pocket to someone else’s, it doesn’t disappear. Raising taxes doesn’t depress demand, overall. It only depresses demand if the government uses the new tax revenues to pay down some of its debt.
I think we need to consider an average inflation rate in the Western world running at around 5 to 6% until central banks start destroying some of that $19 trillion they created.
How should businesses invest?
Joe Galvin: In making decisions regarding the year ahead, including budget and planning, 5 to 6% is a number that we should just assume is going to be the constant.
In the last 10 years, pre-COVID, we were pretty comfortable in the 0.5 to 1% range, which meant nothing. But now you’re saying we’re going to see an increase.
What are the implications that on business investment? Does that mean you should go and borrow all the money you can while interest rates are low and how quickly will this happen?
Roger Martin-Fagg: That’s a very good point. I’m loath to say, “Borrow as much money as you can because interest rates surely are going to rise.” I know everyone is keen on leverage, but I’m not keen on too much leverage. Some leverage is a good thing, but too much leverage when things get nasty — as they will do in four, five years — is not a good idea.
But invest in labor substitution, absolutely. Innovate. And invest in training, invest in development, in invest in understanding the high-bridge workplace.
Don’t wait for inflation to moderate
Joe Galvin: As we go into 2022, should we assume that this is not going to moderate? That this is just the playing field we’ll be dealing with in terms of how inflation’s going to impact the balance sheet and budget decisions?
Roger Martin-Fagg: That’s my view. The biggest impact of inflation is in working capital. And that is going to increase the cost of doing business, but in the UK and the U.S., banks are more than willing to finance working capital right now.
Watch wage awards for where inflation is headed
Joe Galvin: What are some of the signs we should be looking for? The signs that say that inflation is going to continue to increase or that it’s peaked and will soon fall?
Roger Martin-Fagg: That’s a good question. One of the main signs is the oil price. If we see the oil price very quickly moving back to around $60 a barrel, then I think that is a sign.
But what you’ve really got to look is wage awards. Wage awards and average earning. It’s not what the wage rate is, it’s what’s actually being paid. Because wages are 80% of the system.
Joe Galvin: Raising wages for new hires creates a spiral as existing employees say, “What about me?”
Roger Martin-Fagg: Absolutely.
Joe Galvin: It’s clear that the talent wars are going to continue to rage for the foreseeable future.
Roger Martin-Fagg: Absolutely right.
Interview edited and condensed for clarity.