Inflation - What does it mean for the world order?
How does it change things for us?
We have all heard about the 4 P's of Marketing, Product, Price, Place and Promotion.
Yesterday I learnt about the 4 P's of Inflation. Politics, Policy, Priorities and Poverty.
Let's start with history.
The year is 1933.
Germany lost World War 1, the controversial treaty of Versailles is signed.
What did it mean for Germany?
It lost 10% of its land, all its overseas colonies, 12.5% of its people, 16% of its coal & 48% of its iron industry.
There were also the humiliating terms, which made Germany accept blame for the war, limit their armed forces and pay reparations.
This led to an outflow of ~USD 31.4 bn.
As they say there is always someone who looks at opportunity in adversity.
What Opportunity?
All you read were adversities, right?
Imagine being in a situation like this, in a country that has just lost war and has to now pay repatriations!
Hyperinflation, Job Loss & Civic Unrest!
So, what opportunity?
Who seized it?
Adolf Hitler.
Hitler was sworn in as the Chancellor of Germany.
January 30, 1933.
And the rest, is history. Inflation holds the power to change the course of history.
So let's try and break down the 4Ps. But before that, some context.
We live in a world today that -
1 - Is deeply inter-connected
2 - has a premise of operating in free markets
3 - Global trade works on point 1 and 2 except for special circumstances
So let's start with the first P - Politics.
Inflation is often called the mother of political change.
While we started the thread talking about Germany and Hitler coming to power, at this juncture we can't ignore the fact that a part of Europe is in war.
Why is it the mother of political change?
Inflation leads to higher prices.
Higher prices lead to lower purchasing power (given incomes don't rise disproportionately).
As things get expensive, people are not very kind when they end up in polling booths.
In the US, 1980s were characterised by high inflation, high unemployment and also presidential elections.
Carter (on the left) ended up losing to Reagan (on the right).
Currently, US Food Prices are up 10% and Unemployment is up 8%
US mid-term elections are due in Nov'22.
Currently, the global food inflation is at 7%
50 countries go to polls this year -
1 - Brazil
2 - Israel
3 - Bangladesh
4 - Pakistan
5 - Turkey
If prices continue to rise, leaders can end up losing office. And guess what leaders do when they come to office?
Any leader, anywhere in the world - irrespective of how good, bad or ugly he / she is, has one and only one mandate.
Welfare of the people?
Being remembered in history?
Do good for the society?
I hate to burst your bubble - it is one and one thing only.
Re-election
My beloved Economics teacher from school and one of my most beloved mentor, had done a deep dive on this a year back. Check it out -
Long story short - country has lost 20% of their population, currency lost value and inflation?
Inflation is so high in the country that at one point toilet paper was more expensive than the currency that was being used to buy it.
Let that sink in.
Toilet Paper > Currency
Now that we are done with the First P, let's now come to the second P - Policies
Inflation forces change in policies.
In the current scenario when we see prices of food items being record high, let's look at the list of countries that have banned export of food items.
Trade policies move from
free markets → protectionist
Internal food security > Global Trade
No government wants hungry voters - as it is prices are reaching sky high, why risk food security?
Currently inflation at Eurozone is at a 3 decade high.
What more?
Russia makes up for
40% of European Gas
26% of European Oil
Why is this relevant?
Winter is coming, unlike tropical countries, they require gas to heat their homes.
Everyone can't afford elevated energy bills.
With no side talking about concessions in the ongoing conflict, the end result is often borne by common people - high meal costs, high energy bills and what not.
This brings us to the 3rd P of Inflation - Priorities.
Priorities can often change both at the National and the International level.
For instance, Inflation can make people forget about climate change for a while.
Coal has suddenly become the primary energy choice amidst elevated prices.
As petrol, diesel and gas gets expensive, countries rely on cheaper energy sources.
Even if this comes at the cost of reversing climate change.
So, where does this leave us?
Let's come to the final P - Poverty
More than 1.1 bn people live below poverty line.
This basically means that they find it really tough to live their day to day lives.
With inflation more people are often pushed to poverty.
This also leads to other social problems -
- malnutrition
- miscarriage
- infant mortality
- crimes
- joblessness
This often leads to a chain reaction that can take years to stop / reverse.
This thread was inspired by this brilliant video I saw yesterday posted by
@WIONews -
So how does inflation affect us, as investors?
Should we be worried?
Here's a thread breaking down the basics of investing and what can you do as an investor to protect yourself from inflation.
What do you think is the most concerning implication of inflation? Reply to this e-mail with your thoughts to take the conversation forward.