The stealth bomber, an
advanced strategic aircraft for
the U.S. air force, was built from
ground up to evade radar
detection. It achieves this wonder through a combination of design,
advanced composite materials
and special paint. By being significantly less
visible, the stealth bomber can
more easily penetrate dense anti-aircraft defenses, raising the chances of a successful
bombing mission. The element of surprise remains
essential to modern warfare.
The economy, in the more recent past, has also been experiencing a “stealth bomber” like moment of its own. The current economic cycle is somewhat odd: you have large economies such as the U.S. and Europe that have maintained extremely loose monetary policies over an extended period, and yet an almost total absence of inflation. So what gives?
What if inflation is actually surging and the traditional methods of measuring it are just not capable of capturing the rise. Wouldn’t that be the equivalent of a surprise stealth bomber strike? That depends on what happens next. If the authorities are underestimating the true extent of inflation and this cumulates over the long term, we might reach a point where it becomes too late to do something about it.
The evidence on stealth inflation is at best inconclusive, but there are plenty of signs of anomalies in the greater economy that do point towards a “stealthy” form of inflation picking up. The sharp rise in asset prices over the last year and half is a case in point. Equity markets have been surging, but so have such things as the auction prices for select art or real estate in prime locations across the globe. These are pockets of bubbles that don’t appear in any of the CPI measures.
The economy, in the more recent past, has also been experiencing a “stealth bomber” like moment of its own. The current economic cycle is somewhat odd: you have large economies such as the U.S. and Europe that have maintained extremely loose monetary policies over an extended period, and yet an almost total absence of inflation. So what gives?
What if inflation is actually surging and the traditional methods of measuring it are just not capable of capturing the rise. Wouldn’t that be the equivalent of a surprise stealth bomber strike? That depends on what happens next. If the authorities are underestimating the true extent of inflation and this cumulates over the long term, we might reach a point where it becomes too late to do something about it.
The evidence on stealth inflation is at best inconclusive, but there are plenty of signs of anomalies in the greater economy that do point towards a “stealthy” form of inflation picking up. The sharp rise in asset prices over the last year and half is a case in point. Equity markets have been surging, but so have such things as the auction prices for select art or real estate in prime locations across the globe. These are pockets of bubbles that don’t appear in any of the CPI measures.
There is also the case of currencies. These have remained
relatively stable from the perspective of purchasing power
and fluctuations in exchange rates over the last couple of
years. That perception becomes grossly misleading when
you start comparing paper money to gold (arguably the
most consistent and objective measure of value in
existence). The value of gold has been rising for most of a
decade and half. In the meantime, the world’s major
currencies have been depreciating against gold.
One may ponder at the long-term implications of a stealthy inflation buildup. For monetary authorities, it is akin to navigating a ship with a faulty compass: the path taken could be the wrong one. If governments are relying on the same measures as the public, the policies that are being enacted could be causing long-term damage.
We may already be experiencing some of the effects of this surge in unaccounted for inflation. There is more than just anecdotal evidence that it may be widening the social inequality gap. Asset bubbles tend to benefit the owners of those assets. If everything else remains constant, or worse, loses value, it will widen the disparity between the “haves” and the “have-nots”.
It could also be that this “stealthy” build up is a time bomb that will culminate into the next major economic crisis. If the value of paper money is truly depreciating, and the difference between the “perceived” value and its “real” value continues to widen, people will eventually become aware. That would be a “risk on” moment, which could trigger a shift from “paper money” to tangible assets. Considering that the “intrinsic” value of a firm’s share price is obtained by calculating the present value of future revenue streams, a depreciation in the purchasing power or value of the currency may also trigger a selloff in stocks.
What is certain is that the economic realities on the ground today are very different from those of the past. As such, policies, but more importantly, economic measures need to be carefully revised to reflect and adapt to these “changes”. Not doing so is just inviting trouble ahead.
One may ponder at the long-term implications of a stealthy inflation buildup. For monetary authorities, it is akin to navigating a ship with a faulty compass: the path taken could be the wrong one. If governments are relying on the same measures as the public, the policies that are being enacted could be causing long-term damage.
We may already be experiencing some of the effects of this surge in unaccounted for inflation. There is more than just anecdotal evidence that it may be widening the social inequality gap. Asset bubbles tend to benefit the owners of those assets. If everything else remains constant, or worse, loses value, it will widen the disparity between the “haves” and the “have-nots”.
It could also be that this “stealthy” build up is a time bomb that will culminate into the next major economic crisis. If the value of paper money is truly depreciating, and the difference between the “perceived” value and its “real” value continues to widen, people will eventually become aware. That would be a “risk on” moment, which could trigger a shift from “paper money” to tangible assets. Considering that the “intrinsic” value of a firm’s share price is obtained by calculating the present value of future revenue streams, a depreciation in the purchasing power or value of the currency may also trigger a selloff in stocks.
What is certain is that the economic realities on the ground today are very different from those of the past. As such, policies, but more importantly, economic measures need to be carefully revised to reflect and adapt to these “changes”. Not doing so is just inviting trouble ahead.
