Pippa Malmgren: Inflate Essentials; Deflate Discretionaries

Watch the interview.  It is fascinating.  She seems to be right on most accounts.  Judge for yourself and leave a comment.


“You can’t just make ‘enough’ or ‘the right amount’ of inflation.  Once you unleash it, it goes, and you can’t control that outcome.”

Pippa: So it’s an interesting phenomenon where it feels to people, even in the US, the UK and outside of Europe, like everything that’s mandatory is going up in price, and everything that’s discretionary is going down. So your Apple iPad, that may be falling in price, but the cost of your rent, your fare on the subway, your school fees, your college books, healthcare; all the things you have to have, those prices are definitely rising.

And so a central bank says, “Well, one offsets the other”, but I have a real question about this: the Chinese have recently announced Foxconn – our biggest employer in China – that they’re building their first production facility in Pennsylvania, ie: it’s starting to be less expensive to produce in America than in China. Do we really think that these prices will keep falling?

And there’s a bit question about a very technical issue called hedonics, which is about quality adjustments, and the thing is, OK yes there are great quality adjustments on an Apple iPad, so you pay the same price but you get much more computing power, but three quarters of us don’t know how to use it.

. . .

Merryn: No, with both of those- we’ll come back to innovation in a minute, because I know you have some interesting things to say there, but before that: this conflict between inflationary and deflationary impulses, you are very worried about social unrest and rising militarism in quite a lot of the world, right?

Pippa: Indeed. So let me try and explain it as I understood it from the Russian and Chinese officials that I talked to in the course of writing the book. Their view is, “Look, how does the US and the industrialised world get out of their debt problem? They’re going to default” and there are different ways you can default, you can say, “We’ll just never pay you back”, the Argentine style. You can say, “I’ll pay you back a little later, a little less”, the Greek style haircut. You can default on your own citizens and call that austerity.

But all three of those are politically unattractive. The best way, the way you always choose, is inflation. That’s how you paid for the American Revolution, the Civil War and Vietnam. So it’s like what Goldfinger said to James Bond: “Once is happenstance, twice is coincidence, three times is enemy action”.

So both the Russians and the Chinese say, “Look, we’re your biggest creditors. Not only are you defaulting on us, so we’re going to take a hit at some point, but you are creating the conditions for price instability in the world, through this quantitative easing approach that you have”. And sure enough, when quantitative easing was going up, your oil price went through the roof the minute that they announced it’s over; all commodity prices started to collapse. So they’re objecting to that volatility, and they believe that the effort will succeed.

And if that’s the case they have to protect their own citizens from the consequences, and so both are now reaching for assets – food and energy in particular – way more aggressively than before. So the Chinese say, “The South China Sea where we have 10% of the world’s fish-supply, new natural gas field finds – I think that’s ours now. Based on what you guys are doing. We don’t want to have an argument about that.”

The Russians are saying, “Ah, Ukraine, fourth largest food producer in the world, I think the value of that has gone up, and I think, given a choice we’d rather hang onto that.” And the Arctic, as another example, where Russia’s been much more aggressive, because they think there’s 30% of the world’s oil supply and 15% of natural gas. And we’re back to fish: the price of fish in Russia’s up like 60% since the sanctions were announced. That gives them impetus to say, “Fine, then we reach”.

Here is Pippa’s book, Signals: The Breakdown of the Social Contract and the Rise of GeoPolitics, Dr. Philippa Malmgren, 2015.

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