Sorry, we’ve run out of ammo

Sorry, we’ve run out of ammo

June 18, 2022 0 By Michel Santi


Inflation and deflation lead to the same conclusion: the loss of buying power. Up until the very recent past, deflation was caused by outsourcing to developing nations combined with rising global debt levels. Having tried – sometimes desperately – to revive inflation, the central banks got more than they’d bargained for but were also vindicated by the pandemic that had as its main macroeconomic effect a widespread halt to production and supply while demand, in turn, remained intact and even increased thanks to the stimulus measures implemented by governments. It is of course this massive imbalance that was the decisive spark that reignited an inflationary fire that we thought had been extinguished for good.

Hadn’t certain countries with modern economies – including not least Japan and Switzerland – all tried for decades to bounce back from it, if only with just a few embers still burning? Such was the extent of it that the expression “the lost decade” made its entry into the lexicon and that I myself made several commentaries declaring that we had “all become Japanese”. And then the pandemic came, which had a devastating and fundamentally destabilising effect on supply chains. Inventories and stocklists evaporating, orders being made in bulk and doubling in frequency for fear of shortages, and goods being hoarded were all common occurrences across the swathes of people stuck in lockdown. This was down largely to the bucketloads of stimulus payments and subsidies that were handed out to economies and consumers by governments that had been understandably stunned by the sudden death of economic activity. This is the simple explanation for the gradual, but certain and inevitable, increase in the accumulated cost of everything that could be bought. This is also why this pandemic represents – with regards to inflation – the worst of what might be in store for us.

However, the disasters are not about to spare us, with a new and completely different trauma insidiously setting itself in motion that will see a collapse in consumption. Property, vehicles, raw materials, stocks, crypto: these assets are basically all damned to hell. The totally unprecedented state generosity that was doled out without keeping track of the numbers for two years is now running dry, at the precise moment that consumers and traders are having to deal with food, energy and property prices at levels that haven’t been seen for generations, and also when things are being made even harder with interest rates going up. The rug has therefore been pulled from under the feet of the public and the earth has opened up beneath them, because the biggest stimulus measures since the end of the Second World War are coming to an end while living standards are regressing dramatically because of the widespread increase in prices. The consumer is therefore immediately having to accept a fall in wages (because of the drop in state welfare) coupled with an unprecedented rise in prices that will end up very shortly causing private debt to explode and – ultimately – a collapse in consumption.

The middle class is therefore being cursed forever as it is hit by one disaster after another: the one on the horizon now is made of a deflationary recipe concocted on the one hand by assets (shares, property etc) in freefall and financial commitments and debts cutting off circulation on the other. The dramas and crises suffered these last twenty years are thus doomed to repeat themselves, with one fundamental difference, however, which is that – this time – we will not have any safety net to fall back on from a government that can no longer do anything for us.

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