All market participants are navigating in rough seas for the past three months. The fear of hyper-inflation is now become our reality. In such rough seas, the markets are plummeting, and part of the wealth created during the normal or low inflation period, is burnt. All this is happening while cost of living is higher than what it used to be, and consumers are spending less money, or cut non-essential expenses. This leads to lower sales for businesses, and eventually higher unemployment. Is there an end to this cycle?

The answer is yes. Our economies have never entered a death spiral, because people need to live. And we can't live without a living economy, supplying us the means for living. To understand though where all this ends, we need to understand what is inflation and how it works.

Inflation and interest rates in the global economy

To get the concept of inflation, we need to understand how the global economy works. Global production output is growing at a slightly higher pace than the current Gross Global Product (the global economy expressed in US Dollars). This is how cars, computers, meat, and most goods or services are relatively more affordable than what they used to be 20 or 40 years ago. To make a more everyday life example, if a country is getting a 25-year loan with interest rate of 2% (that is 50% in total), inflation is the actual interest rate: if it's lower, then invested capital is over-performing, while when it's higher, then invested capital is underperforming. And you don't want to have invested capital to under-perform, because those who own it may look to get their money to better performing investments.

To get the long story, short: inflation more or less is expected (or designed) to be equal to the growth of the economy is current prices. If you take inflation out, you would see that the global economy is growing at a very slow pace.

What happened during the 2008 crisis

The 2007-2008 financial crisis was simply a disruption. Investors discovered that parts of the economy were over-financed (or over-capitalized), and not only were not under-performing, but in reality had already started to burn invested capital, with the actual interest becoming deeply negative. The only way to save any remaining capital, was to have the losses written-off (in some cases at the expense of others), remove any excess capital from financing, and start afresh. This had a deep but temporary impact on the Gross Global product, and economies (with few exceptions) recovered within 2-3 years.

The pandemic crisis

During the 2007-2008 crisis, global production output stayed more or less unchanged. This explains why we didn't have significant changes in inflation. When the pandemic started, something happened that had never happened before: production output was reduced, due to the lockdowns. If the economy was functioning properly, and consumption demand had stayed at pre-pandemic levels, inflation would have started going up 2-3 months in the pandemic. But with consumption demand following the production output decline, this was not immediately visible. In some cases, raw material, like oil, were trading at huge discount compared to the 'normal' cost+margin prices of $36-48 a barrel - remember the day that oil was trading at below zero prices?

Under normal supply-demand conditions, oil going under $20 a barrel should have started deflation, if prices had started declining. This never happened. Businesses, started offsetting reduced demand costs, by pocketing the reduced raw material price differences. Many businesses continued thriving during the pandemic at the expense of their customers (that's you). Shipping and cargo transportation businesses made fortunes, during the pandemic, by raising their prices up to 10 times compared to pre-pandemic levels, despite their reduced costs, by artificially cutting-off routes.

Then the economy started recovering, and raw material prices started going up, as you would expect under supply and demand. And greed took over. Fortunes made during the pandemic were not enough to those guys. They wanted more. And timing was perfect: who wants to have empty storage facilities in Black Friday and pre-Christmas period? So, they raised their prices once again. Wholesalers and retailers who wouldn't fall for their blackmail, would only see empty shelves. This explains why inflation was visibly on the rise starting last December.

Then the war in Ukraine started and raw material prices started going up once again, due to reduced supply, triggering inflation rates we haven't seen for a generation. We have seen before oil priced at over $100 a barrel. In June 2008, oil was trading close to $140. Six months later, it was trading close to $40. Did you see prices going down, and the economy going into deflation? No. From March 2011 through August of 2013, oil was trading over $100 a barrel, and 3 years later it was trading at under $40 a barrel. Did you see prices during those 3 years going down, and economy going into deflation? No. Again! When raw material prices start going up, those guys are quick to ask for government support, or raising their prices, but when raw material prices go down, they are simply doing us the favor to keep their prices steady (and piling-up cash in their bank accounts).

The way forward

Unless anything unexpected happens, inflation is expected to return to normal 2-3% levels at around March next year. By then, our governments should make clear to those who are making fortunes out of the need of our societies, that they shouldn't count on government support when the next crisis comes. They have made enough money to support their businesses themselves. We, the people, have bailed them out so many times, we have lost count...

Enough is enough!