Kal Mai Girega - The Global deflationary supercycle (4/5)

A dollar today is always worth more than a dollar tomorrow. That's what all of us have been taught in school. Inflation is like a termite, constant gnawing at the value of the money you have, making it worth less every passing day.

For quite some time, atleast in the developing world, inflation was a major problem. In countries like Zimbabwe hyperinflation put the economy in ruin. Many Latin American countries faced a similar fate, albeit at a lower scale.

But the "problem" we face now is different. In today's post we tackle deflation, and look at both its impact both on the economy and the markets.

A weakening cartel

Crude is an important driver of inflation globally. While the history of crude and the major events will take a whole other blog post, for our theme it would suffice to understand the most recent disruptor on the supply front - Shale, that not only brought in a large volume of crude to the market, but also weakened the strangle hold the cartel had over prices. The new supply dynamic combined with a weak demand environment has brought down crude prices, limiting a major source of inflation.

If you'd like to read more, we had discussed the issues at the absolute bottom of the oil cycle here and the Russia Saudi dynamic here.

The giants driving price

Think of all the largest companies you know of - Amazon, Walmart, Reliance, Google, Facebook, the list goes on. What do all of them have in common, other then being behemoths in their respective markets? They've all made things cheaper for you! You no longer have to write a multi-crore cheque to appear on an advert, you can do it with a few rupees and reach your target audience. You no longer have to spend 16 rupees a minute for incoming calls (yes, that's how much it cost back in 1992), you get multiple GBs of data for that amount - and free incoming and outgoing calls on top! Want to buy some groceries, clothes or electronics - the Amazon and Walmarts of the world will use their might to bring you the lowest possible price. The new model for firms has become an obsessive desire to cut costs to gain share - which is great for the customer, atleast in the short run, but has been a disaster for inflation.

The twist in the tale is that a lot of the cheap money that central banks may unleash to trigger growth could directly or indirectly flow to these leading edge tech companies, further boosting their attempts.

COVID adding the final punch

With little to drive up crude prices beyond a limit (with the exception of a conflict in the middle east) and technology being a secular deflationary driver, it increasingly seems likely that low inflation levels will be the norm. The situation only getting grimmer in the current macro scenario with people getting fired and firms going bust.

So that is where we stand - in a weird deflationary loop - the outcome of which is excess liquidity widening the gap between the economic and market reality even further.


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