Inflation And Covid

by at ETX Capital.
Andrew Saks
Andrew Saks

Inflation post COVID. It is not ‘supply chain’ issues. It’s lockdown-heavy, government planned economic Armageddon

Anyone who has ever lived in Argentina, Venezuela, post-war Germany or more recently Russia will be very familiar with the realities of inflation, or as it is often played down by the government and media ‘price rises’.

What price rises really mean is the devaluation of currency, and that is certainly what is looking to be on the cards at the moment across Europe.

Policy Impact

Under the heavily disguised veil which blames supply chain ‘issues’ for shortages of various products which range from trucks and buses to loaves of bread at the local supermarket, the government and the media are tiptoeing around a massive elephant in the room which should really be called what it really is – inflation.

One sector which understands this well is the logistics and parcel delivery industry, and Scott Price, the President of UPS said on Sunday last week that he expects major supply-chain snags to continue into 2022.

He should know. So should the supermarkets, which are so efficiently run that they know exactly how many people live in a certain country with greater accuracy than the government, and on that score, US’s largest supermarket chain said Friday it planned to hike prices alongside other companies.

The world’s largest car manufacturer Toyota has stated that it plans to further slash its output over the next two months by 400,000 units due to the computer-chip shortage.

Similarly, major paint company Sherwin Williams has been plagued by shortages since the Texas freeze, and more recently due to the impact of Hurricane Ida on petrochemical production.

Inflation Signals

These are all precursors to inflation, and they are being held out quite incorrectly as having resulted from a ‘boom in demand’ since the lockdowns began in several western countries in March 2020.

It is far from a boom in demand, it is more that literally millions of workers are refusing to go to work. Those who planned the lockdowns knew human nature well.

They knew that a large percentage of easily conditioned people would get used to their sofa and would take up residence on it indefinitely, especially if the state pays them to do so.

Therefore, there is a double-edged economic sword. People being paid by the state for over a year and a half to stay at home, meanwhile disabling almost every industry sector in the Western world and now the result is about to make its presence felt.

Lockdown Knock-on Effects

The lockdowns have absolutely crippled the economies of many western nations, with the exception of some industries, largely those listed in blue-chip indices such as the FTSE 100 which have been booming, largely due to watertight government contracts, or participation in the large-scale pharmaceutical sector.

Most all other industry sectors have been crippled by the closedowns, and equally crippled by those refusing to come back to work for several months, whilst the government literally prints money to keep them on side and stop any form of rebellion.

Another Way?

Anywhere in the Eastern hemisphere is not like that.

It is a hive of productivity and has been for many years, completely uninterrupted as there were no lockdowns in the nations where the majority of the world’s population lives. India and China, Japan and South Korea – they are the economies of the future.

Socialist policies have demonstrated these traits before, so we can perhaps look at past performance to view potential future outcome.

Argentina

The Argentine economy fared badly during the 1980s when the first debt crisis was in full swing.

Growth of real output stagnated, financial markets collapsed, prices rose as the currency steadily depreciated, and capital fled the country in pursuit of safer havens.

Most public enterprises were running large deficits, and the external debt kept mounting.

The central government, hampered by low tax collections and desperate for revenues, turned to the central bank for finance through the taxation of deposits and money creation.

Inflation, which had risen gradually over the previous three decades, soared—reaching average annual rates of 2,600 percent in 1989 and 1990.

In the face of these developments, the banking system practically disappeared. Although it tried several times to bring inflation under control, the central government was unable either to balance its budget or to escape its reliance on inflationary financing.

This is the true face of socialist corruption and a fiscal policy that never went away after Juan Peron began his single-party regime in the 1940s.

Venezuela

In Venezuela, the public has been impoverished due to Hugo Chavez’ successor Nicolas Maduro having turned out to simply follow in the footsteps of Chavez.

In 2016, imports collapsed by more than 50% (largely due to socialist trade sanctions) and the economy nosedived by 19%.

The budget deficit is around 20% of GDP. The minimum wage is now the equivalent of £25 a month.

Conversely, London’s financial sector employs several middle managers between the ages of 25 and 35 who easily earn between £150,000 to £200,000 per annum, rising to over £500,000 for a senior executive position, and professional mobility – the chance of switching to new firms and accelerating one’s career – is among the best in the world.

After a Central Bank estimate that suggested that the Venezuelan economy had contracted by 19% last year was leaked to the press, Mr Maduro fired the bank’s president and replaced him with a Marxist loyalist demonstrating another very problematic aspect of left-wing control, censorship and that anyone who speaks against the ideology, whether right or wrong, will be removed from office.

Up to £640 billion of oil money was lavished on the country’s poor during the oil boom years, creating a gargantuan dependency culture.

The country quintupled its national debt and hundreds of thousands of homes (of questionable construction quality) were handed to the poor. President Chavez created a massive and unsustainable bubble which is now beginning its slow, painful collapse.

At the heart of Venezuela’s economic chaos lie market distortions. Gasoline is sold locally for less than 1 British pence per litre, and it receives £12 billion of state subsidies a year.

The country has a complex monetary arrangement that makes use of three different exchange rates simultaneously.

This led to a two-tier society which impoverished the general public because those with close connections to the president can buy dollars from the state at 10 bolivars a dollar but sell them at 3,300 bolivars a dollar on the black market – a classic case of ‘do as I say, don’t do as I do.

Price controls have made it unprofitable for small businesses to sell staple goods, leading to widespread shortages. Carjackings and kidnappings are now epidemic.

Caracas’s murder rate is 80 times higher than that of London, which over the last 15 years has become very safe indeed, especially in Central London, and in particular, the Square Mile where it would be extremely rotten luck to have even so much as a wallet stolen from a pocket.

That’s what happens when eventually someone – usually the public – must pay the piper after a period of socialist style economy-wrecking and self-serving.

Russia

In Russia more recently, back in 2014, a large engineering company which employs over 70,000 people and belongs to the government was running up another massive debt and was unable to repay it, so the state revalued the rouble, then converted the debt from US Dollars into roubles, which cancelled the debt.

This meant that all was fine and dandy at the engineering company and it could now be free to operate equally inefficiently and run up another massive debt, but of course the population paid for this, as revaluing the rouble caused the assets and salaries of the public to become practically worthless overnight.

A year later, the rouble nosedived in value, meaning that money was practically worthless.

The streets of Moscow and St Petersburg, large cities home to people with choices, emptied themselves of thousands of people who very soon afterwards could be seen going about their everyday lives on the streets of Chelsea and Belgravia.

This is the problem with policies such as those demonstrated by many Western governments over the past year and a half. You eventually run out of someone else’s money and those conditioned to thinking the government will ‘look after them‘ will be in receipt of a very sharp shock.

A generation before me, there were scenes of people in central Europe going into a bakery to buy a loaf of bread with a basket of bank notes, only to be told by the baker not to give these enormous reams of cash to him as he had nowhere to put it. IE, it was worthless.

One thing’s for sure, though. The Swedish, Mexican and Japanese economies will be just fine.

Risk warning: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.18% of retail investor accounts lose money when spread betting or trading CFDs with ETX. You should consider whether you understand how spread bets or CFDs work and whether you can afford to take the high risk of losing your money.

Monecor (London) Ltd is a member firm of the London Stock Exchange. Authorised and regulated by the UK Financial Conduct Authority (FCA) with Financial Services register number 124721 and the South African Financial Sector Conduct Authority (FSCA) under license number 50246.