Inflation: The Truth is Out There

After having failed to prevent the 2008 Great Recession; after having responded to over-indebtedness with strong incentives to over-indebtedness through unprecedented quantitative easing policies; after having sparked an indecent appreciation of assets, central bankers now fear the return of inflation as measured by the CPI. Well, the harm is already done, Sirs.?

The CPI ignores the elephant in the room, or what holds for the CPI does not for other assets not included in it.

The statement that low-end furniture prices have remained stable (or dropped, once taken into account technical progress) holds, as I suggested in a previous article. However, it is another story dealing with high-end, more durable assets.

Goods out-of-the-common have always been inaccessible by definition. Yet, they are becoming increasingly so in the face of competition between billionaires. First come, first served. Then, the less outrageously wealthy among them rush to the other less expensive prestige properties and, by contagion, drive prices up and move the less endowed down.

Note that this process is the only illustration that vindicates the trickle-down effect of the Reaganomics, but not in the way they would have liked. The original and fuzzy idea was that letting the wealthiest get wealthier would ultimately benefit workers and spur economic growth. Instead, it has appeared to be “let the wealthiest get wealthier, and asset prices skyrocket” in the last decades.

In France, even France Stratégies, the Prime Minister’s think tank, suggested in October 2021 that the suppression of the ISF and IFI in 2017 has had no significant effect on corporate financing by private investors (which was the aim of the measure). Instead, the reform mainly concentrated further record level of dividends on the 0.1% wealthiest [1].

Woe betides those too late or have neither inherited nor cheated their way to wealth.

Such a tide affects tangible assets that can be stored away from the residence authorities and resold at a profit. This phenomenon once concerned top-end real estate and lavish spending. Now, the new generations, more imaginative or just greedier, invest in all sorts of assets.

One example among dozens is the prices of violins stamped Stradivarius, which decupled in a generation of musicians. Not sure that the number of virtuoso cellists has increased proportionally over the period. The same holds for watches, paintings, Tintin stuff, and more broadly contemporary art, whose sales grew by 117% to reach USD 2.7bn in 2020-2021, driven by the use of NFTs [2].

How to explain the rush into these kinds of assets?

There are many reasons, but a few significant trends stand out.

• First,?international tax cooperation?put in place in the wake of the 2008 crisis. Its main consequence was the end of tax secrecy, which had billions of dollars out of undeclared accounts.
• Second, the?meteoric rise in wealth of the Chinese and Hongkongers, which followed that of the Gulf States and the Russians, poured billions into financial markets. They aimed at diversifying their assets, first in the United States and then throughout the world.
• Third,?the desire of these newly rich people to save part of their wealth outside of the financial sphere and in no way to invest in their country’s economy. Indeed, those who got rich in China, Russia, or Saudi Arabia did not and still do not trust either the ability or the will of their government to enforce Western values such as individual property rights or independence of judiciary power. Therefore, they take their money out and let it trickle into the USD-denominated universe of goods (tangible or not).

Central Bankers have been fuelling asset appreciation while quelling payroll-driven inflation over the last years.

Central bankers have put themselves in an uncomfortable situation. On the one hand, they set publicly a goal they struggle to achieve, the 2% annual inflation rate over the medium term. On the other hand, without really formalising it, they (especially the Federal Reserve) have been acting since 2009 as the lender and dealer of last resort [3]?to prevent financial markets from collapsing, pushing global indebtedness to new highs after each crisis.

This, in turn, leads to global assets appreciation, which affects price levels and, more generally, the whole economy. At the bottom end, the average citizen is left between the hammer of hawks calling for austerity and the anvil of indebtedness, struggling to make ends meet.

Continued strong appreciation of tangible and intangible assets on the one side and price and wage stability on the other: what kind of society are our leaders shaping?

We may be witnessing a paradigm shift to an “Uberisation” of the economy. A system in which most of the population is kept slightly above the poverty line, struggling under the permanent threat of becoming redundant through delocalisation, automation, or the myth of artificial intelligence.

In such a system, GAFA and their henchmen flood consumers with goods plagued with programmed obsolescence but with prices presented as stable; consequently, they end up renting everything else.

(Industrial)?panem et?(TV)?circenses. Same old, same old.

As a concluding thought, let’s take the reasoning to its logical extreme: Are we witnessing the generalisation of the twenty-first-century proletariat?

In a way, yes, but tempered by the prospect of owning own home one day in return for living on the edge of over-indebtedness – this hope being the last safeguard before the uprising of the desperate.

?

[1]https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/fs-2021-troisieme_rapport-fiscalite_du_capital-octobre.pdf

[2]https://www.lefigaro.fr/culture/encheres/record-de-ventes-pour-le-marche-de-l-art-contemporain-dope-par-les-nft-20211004

?[3]?https://www.cfainstitute.org/-/media/documents/article/position-paper/cfa-money-view-covid-web.pdf

Disclaimer: the opinions referenced above are solely those of the author. More precisely, they are among his currently preferred assumptions.