 As 2023 draws to a close, perhaps the biggest lesson we learnt in economics this year was that inflation turned out to be (dare I say) transitory after all. This should mark a major turning point in our understanding of the causes and cures of inflation and impact future policy in a positive way. More on that later.
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 Over 14 years ago in June 2009, I founded my company, Gorilla Post Production. A few months beforehand I, like thousands of others, lost my job during the financial crisis. My career up to that stage had been going quite well having gained 5 years experience in the TV & Film industry as an audio engineer
 Despite rising interest rates over the past 18 months, house prices across much of the developed world have held firm. In the Euro area, house prices for the first two quarters of 2023 have fallen by less than 1% and in the US, although 1.2% lower compared to 12 months ago, house prices have started rising again. Many analysts have been taken by surprise.
 The opening paragraph of T.K Whitaker’s seminal work, “Programme For Economic Expansion”, in 1958 reads “The programme for economic development contained in this White Paper has been prepared in the conviction that the years immediately ahead will be decisive for Ireland’s economic future.” The paper was motivated by the economic paralysis that plagued the Irish economy at that time lending itself to high unemployment, emigration and an over dependency on exports to Britain.
 I find Andrew Bailey’s regular pleas for wage restraint in the UK extraordinary. As the governor of the Bank of England he holds one of the most privileged positions in the country and earns a salary just shy of £600,000 per year. Meanwhile, the UK economy is experiencing one of the worst cost of living crises in its history with ordinary workers’ wages, adjusted for inflation, well below pre-pandemic levels.
 At a networking event during the week in France, spoilt by the magnificent mountain views that surrounded lake Annecy, I stood among my colleagues drenched in the evening sun, and quietly wondered to myself was I the only miserable eejit thinking about a recession?
 I’m a bit late weighing in on the Michael D “economics is rubbish” debate but I thought I’d lend my own perspective nonetheless as someone who has just come through the academic system. I completed my BA in economics 22 years ago, on 9/11. Sadly, my graduation day will obviously be remembered for the wrong reasons.
 As part of my final research for my masters, I decided to carry out a study on the effects of gross fixed capital formation (GFCF) on labour productivity in Ireland from 2000-2022. GFCF is capital investment in roads, railways, factories, infrastructure and other productive assets. It is widely regarded as one of the best predictors of long-term economic growth.
 I recently finished reading a book by Italian economist Paola Subaachi called “The Cost of Free Money.” While the book mainly discusses the adverse effects of low interest rates and unfettered capital, I couldn't help but link the common thread in the book to last week's events at SVB bank and Credit Suisse. Both cases are directly related to the low cost of capital that has shaped the world economy over the past 15 years.
 As CPI in the US slowed to 6.5% this month on a year over year basis, inflation is now proving much more (dare I say) transitory than many expected. All things being equal, inflation looks set to continue its slide this year meaning the entire period of rising prices since mid 2021 will have lasted just over 18 months. So much for the hyperinflation predicted by some analysts in the face of 'reckless' government spending and money printing.
 In 1974, US economist Arthur Laffer devised a novel policy that aimed to generate higher tax revenue for the government. The idea, although controversial, was simple. By cutting corporation taxes businesses would create more jobs and improve economic output. After almost a decade of high unemployment and inflation, economic policy thus shifted towards supply driven incentives. Lower taxes, Laffer believed, would kick start the economy and boost government revenue in the longer term.  I remember around the middle of last year, Gorilla Post Production, the company that I founded in 2009, hit an extremely busy period. It was by far the busiest period we’d ever had in 13 years since we started. In the final two quarters of 2021 our revenue almost doubled compared to the same period a year earlier, and was 35% higher compared to the same period in 2019 before the pandemic. Over all, our revenue in 2021 and 2022 will be roughly 25% above pre pandemic levels on an annualised basis.
 The drag on consumer demand from rising prices and energy bills is causing public outcry across much of the developed world. Naturally the policy response from governments has been to offer large fiscal packages to sooth the effects of soaring inflation. In the short term, subsidies and price caps will undoubtedly help cash strapped households and businesses navigate a gruelling winter.
Much of the talk in financial markets over the past year or so has been focused on inflation and rising interest rates. As prices rise, central banks raise interest rates to squeeze consumer demand and bring down inflation. But so far it hasn’t worked. In the US, core inflation which strips out food and energy prices, unexpectedly rose in August reflecting robust consumer demand.
 Vladimir Putin’s recent demand that Western sanctions be lifted before gas supplies to Europe resume is a sign that sanctions are beginning to hurt the Russian economy. Many have wondered, given the Rouble’s strong recovery shortly after sanctions were introduced, whether widespread embargo's on the Russian economy would have any sustained impact long term.
 Within a few days of news breaking that US GDP had contracted for a second consecutive quarter in 2022 (which in many countries defines a 'technical recession') the US labour department published a report on August 5th showing that the economy added 528,000 new jobs in July - double the amount economists had predicted. Unemployment in the US is now 3.5%, its lowest level in fifty years.
In Ireland, according to the Central Statistics Office (CSO), unemployment now stands at 4.2% meaning the Irish economy has made a full recovery since the pandemic. There are now as many people in employment in Ireland as in 2019.  There are few places to hide for investors when interest rates and inflation are rising. Government bonds, which are usually a good diversifier during a market downturn, have collapsed in almost equal measure to equities this year leading many analysts to refer to the current environment as the “everywhere risk”.
During the business cycle of 2010 – 2020, the average annual market return on the S&P index was about 14%. With inflation at 2%, investor’s real return was 12%. Today, however, with inflation at over 8% and share values correcting across all indices, investor returns are in free fall. The S&P and Nasdaq are down over 20% compared to this time a year ago. 
With little breakthrough in peace talks between Russia and Ukraine, and fresh restrictions in major cities across China, the inflationary pressures worldwide are likely to get worse before they get better.
Clogged supply chains and growing geopolitical tensions are leading some countries to reconsider their borders and trade policies. Many economists believe, a period of de-globalisation could follow. Being less dependent on others for energy, food or medical equipment might circumvent future supply shocks and lessen the risks of inflation. But such protectionist policies may also reduce incomes worldwide and embolden populism.
While an embargo on Russian gas would be costly, Europe can afford it.
As the heavy bombardment of Ukrainian cities continue, the Russian invasion could yet prove to be Putin's biggest own goal.
The internal conflicts within America and Europe in recent years - caused mainly by the shambolic regimes of Donald Trump and Boris Johnson - were the perfect backdrop to Putin's invasion from a Russian perspective. Indeed, President Biden’s seeming lack of appetite for war in Afghanistan and the subsequent withdrawal of US troops from the region in late 2021, must have signalled to Russia that Western hegemony in geopolitics had reached an historical low point. 
Despite the lifting of restrictions worldwide, some businesses are becoming increasingly bearish about future earnings.
A combination of weaker consumer sentiment and the fear of higher interest rates could mean slower overall growth for the world economy.
Cop26 and the government's new climate action plan flatter to deceive
Instead of a genuine discussion on climate action, Cop26 is playing host to political opportunism and guff. The war on carbon is as phoney a war as they come. Tackling climate change should be part of every government’s key policy over the next decade, but how credible can recent events in Glasgow be when two of the largest carbon emitters, China and Russia, fail to attend?
How genuine is Boris Johnson, the host at Cop26, who in 2015 spoke of climate change as "primitive fear"? In 2019 he referenced demonstrators as "uncooperative crusties" who should stop blocking the streets of London with their “heaving hemp-smelling bivouacs.” Given the mess of Brexit and the UK's on-going threats to abandon the Northern Ireland protocol, which it agreed late last year, the public need little reminding about taking political promises with a pinch of salt. 
For many economists the nature of money is still a source of great debate. Who creates it? Is it commercial banks or central banks? Are we creating too much or too little?
Due to the debasement of fiat currencies and rising inequality worldwide, supporters of cryptocurrencies believe the future of money lies outside of the traditional banking system and in decentralised finance, or DEFI. According to The Global Macro Investor (GMI), there are currently 150 million crypto users worldwide with that figure expected to rise to 1 billion over the next 3 - 4 years. GMI state that crypto is the fastest adoption of any technology in human history surpassing the internet in the late 1990’s and early 2000’s. With so many people entering the crypto space, prices are predicted to rise exponentially 
Referring to economics in the mid 1800’s as the “dismal science”, Scottish philosopher Thomas Carlyle coined the phrase in response to the economics profession’s lack of defence of slavery in the West Indies. According to Carlyle, the optimum level of labour in the economy should be a combination of market forces plus coercion.
Given the backdrop to the dismal science tag, therefore, the criticism of economics seems misplaced and harsh to say the least. 200 years later the tag remains, however, aimed mainly at economist's regular failure to predict market crashes and recessions. 
The furore surrounding Bitcoin in recent years has caught the attention of even the most hardened of crypto sceptics in financial markets. Rarely in recorded history has an asset returned 600% in 6 months. Bitcoin’s phenomenal rise can be largely attributed to a wave of new tech savvy retail investors who poured their discretionary incomes into crypto markets during lockdowns. Bitcoin's price soared from $10,000 to $63,000 in a very short space of time.
Large institutional investors followed. Then came Tesla’s CEO, Ellon Musk who announced on Twitter in March of this year that Tesla would accept Bitcoin as payment. Retracting the statement a month later, however, citing environmental concerns, Musk earned $101 million from his Bitcoin trade while simultaneously wiping $500 billion (60%) off the market cap. Millions of small investors got caught on the downside.
Understanding the monetary system and why we shouldn't fear the 'printing press'
I've covered this topic before in recent weeks but the inflation story has since gained more momentum. As the end of Covid-19 draws closer the markets are beginning a process of repricing.
The sell-offs in government bonds in February and March has been fascinating to watch. It's classic game theory between the Fed (US central Bank) and the bond market. The concern among bond investors is that as economies re-open, consumer spending, in addition to continued government stimulus, will ignite inflation and erode future returns. |
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