Fears of inflation are great. What is the reality behind those fears?
Some point to the funds that our government is spending and its expanding debt. Yet much of the money the government has spent is for infra-structure, which improves productivity and should be seen as an “investment.” Much of the money given to bankers will be paid back. Importantly, the government replaced only a part of the capital that was lost in the subprime crisis.
Given the 10-to-1 leverage that banks can use, this has led to a restricted money supply. To put this differently – capital has been hard to get!
It is estimated that the government infusions replaced only 45 to 55 percent of lost capital, if that much.
Lastly, few understand, and I include those in government leadership, that one purpose of the bailout was to buy time for such companies as AIG and Citigroup so that they could unravel their “too big to fail” operations.
Wages are the primary cause of economic inflation. Worldwide competition and productivity gains will help to moderate wage inflation over the next eight years, at least in my opinion. While there will be job shortages in such fields nursing and engineering, many other positions will face outsourcing and gains from equipment that reduces manpower needs.
As an aside, many bemoan the loss of manufacturing in this country (and elsewhere). Thirty years ago, manufacturing made up about 27 percent of our workforce; today it is about 10 percent. This is similar to what occurred in farming. At the time of the American Revolution, 92 percent of Americans were farmers. Today, that figure is less than 2 percent. Yet our agricultural force is great enough to feed our population, as well as much of the world.
Manufacturing produces more today with less labor.
The recent economic crisis might mean an extension of baby boomer retirements. I believe that many baby boomers will extend retirement to 70, in part for economic reasons but also to fill a void for self-satisfaction with work. Importantly, the echo boomers, a larger part of our population than the baby boomers, is transitioning into new jobs, forming families and increasing consumption. The echoes’ are generally ignored as a force in our economy. They should not be.
With most industrialized countries at zero or below birth rates, many countries will face a workforce shortage. Japan has faced this problem by improving productivity (such as robotics) or exporting capital to China. The United States has an immigration policy that makes it one of the few countries that is increasing its birthrate.
Another sign that inflation will not be a problem is increases in productivity. Paul Winghart, a respected RBC Wealth Management consultant, has made a study of long-term inflation. He points out that “productivity currently is out stepping GDP since 2000 to the tune of +.50 percent per quarter compared to its historical low of about 1 percent for most of the post war period.”
Productivity gains help to moderate the rate of inflation and will continue to do so, in my opinion, for at least the next eight years.
Lastly, I believe that the government will eventually increase interest rates, but only when there is a clear sign that the economy and the banking system have improved. When this happens, many corporate bonds will increase (and their yields will decline) because their credit will improve.
So will we have significant inflation over the next several years? I don’t believe so – repayment of government loans, increased productivity as well as the control of wages will contribute to a moderation in inflation.
Bob Chernow is a futurist who predicted the S&L/mutual savings bank crisis, the future of mortgage backed bonds and the recent sub-prime crisis. He works in the financial industry. His opinions are his own.
