Tuesday, 26 December 2017

Year End Review 2017 - Part 5

Prediction 5 has been a bit like the Curate's Egg. The first sentence of the prediction said,

“As happened in similar conditions, in the mid 1960's, inflation will spike sharply higher.”

Well, sort of. The huge falls in the prices of many primary products that set in around 2014, have certainly been reversed, and the prices of many of those things have risen sharply. The threat of deflation that occupied minds in 2016, has certainly disappeared, as global inflation has started to rise. In the UK, where Brexit has caused a fall in the Pound, that has been exacerbated, as import price inflation feeds into the system, and inflation has continued to rise, at every point that the Bank of England has claimed it had peaked. We are not yet, at the point of the rapid pick-up in inflation that arose in the mid-1960's, but the conditions are in place for such a trajectory.

The second sentence stated,

“As interest rates rise, the price of financial assets, land and property will fall sharply. Money will flow out of those things quickly, as no one will want to be left holding a rapidly depreciating asset, and for those assets that are illiquid, such as property and junk bonds, this crash will be more pronounced as everyone rushes for the exit.”

Well, global interest rates have been rising, and even central banks are now having to raise official interest rates. But, we have not yet seen the take-off in interest rates that are required for asset prices to begin to fall sharply. Partly, that is because of the continued monetary stimulus that is given to encourage speculation, and because of the continued implementation of policies of austerity aimed at restricting economic growth.

The rest of the prediction set out that it did not matter whether the money that came out of speculation went into the purchase of commodities for consumption, or went into productive investment, because the consequence would be that the increased demand for commodities would act to stimulate economic growth, and to cause those commodities prices to rise, as they found ample liquidity to enable that price inflation. The rising demand for these commodities would, in turn, lead to rising levels of investment, so as to meet the rising demand.

That has proved correct, as the continued firming of commodity prices, the notable increase in economic growth across the globe, and the notable increases in employment, as the investment in circulating capital, increase. What we have not seen yet, is the pace of growth that last year I anticipated, and so the extent of the other elements of the prediction have not materialised either. The last quarter of 2017, saw the onset of the latest three year cycle, during which growth tends to moderate for a year. However, such moderation is necessarily a relative effect. Global growth, has in fact, risen notably in the last year, and the pace of that growth appears to be accelerating, including in the most important economies in the US, and the EU. In other words, even if the effect of the three-year cycle is to knock 1% off the growth figure, for 2017-18, that does not mean that the growth figure itself might not be say, 3%, and may, therefore, be higher than in 2016-17. It means that when the effect of the three year cycle is removed, if conditions continue on the same basis, growth for 2018-19, might be expected to be closer to 4%.

No comments: