The U.S. dollar is weak, at $1.42 to the Euro; oil prices are rising, at $86 a barrel; the gold price is rising, at $756 an ounce. These are all signs that the risk of global inflation, the scourge of the 1970s, is rising again.
In The Daily Telegraph for Monday, October 15th, Ambrose Evans Prichard, who is very good at identifying financial storm clouds before they burst over our heads, gives an alarming list of the expansion of money supply in a number of different countries.
“Money is expanding at 18 per cent in Saudi Arabia, 19 per cent in China, 24 per cent in India, 36 per cent in the United Arab Emirates, 41 per cent in Russia, and 69 per cent in Venezuela. With the usual lag, inflation has at last hit. Prices are rising at 9 per cent in Russia, 11 per cent in the UAE and 12 per cent in Qatar, to name but a few.”
As Milton Friedman used to remind us, global inflation is invariably a monetary phenomenon, but, when one has said that, it is still a phenomenon subject to external shocks and to long and unpredictable time lags. We can be confident that the 69 per cent rate of growth in the money supply of Venezuela will in due course lead to further acceleration in Venezuela’s rate of inflation. Indeed, there is already the sinister sign that President Hugo Chavez is taking control of the Central Bank. But we do not know exactly what rate Venezuelan inflation will have reached in one or two years’ time. There are too many variables.
Nor do we know what external shocks may affect the world’s monetary system. There is always the anxiety that political or military events could drive up the oil price by reducing oil supplies. Francisco Blanch, who is the chief commodities strategist at Merrill Lynch, has said that a serious geopolitical problem in the Middle East “could drive oil prices even to $100 a barrel”. Oil at $100 a barrel is a benchmark of crisis, much like gold at $1,000 an ounce, which is quite widely expected in the gold market.
This weekend the International Monetary Fund and World Bank are having their annual meeting in Washington. In the old days of the Bretton Woods System, which lasted down to President Nixon’s closure of the gold window in 1971, these meetings were extremely important, and were often accompanied by pressure on the world’s fixed rate system of exchange. Now they are much less important, though all the world’s leading central bankers will be there. It is still possible to have an exchange crisis, even in a system of floating rates.
One has to remember that the percentage of world trade which is automatically adjusted by floating rates is less than it was in the mid 1990s. The Renminbi is pegged to the dollar, and China’s share of world trade has become much higher. Most of Europe’s currencies have been merged into the Euro. The Dollar has been falling, and will fall further. The Euro is now an overvalued reserve currency. The Central Bankers do not know which way they should be facing. They spent the summer fighting the threat of deflation – they are spending the autumn worrying about global inflation. Alan Greenspan had more room for manoeuvre, but he has left behind a more inflationary world than the one he inherited.
for Markets and Money