Now some other
Fallout for developing nations - Within
existing financial system
High levels of inflation make it harder for developing nations or those with weak economies or currencies to secure finance at acceptable rates and then to repay debt. Increasing levels of inflation in USA are likely to lead to higher interest rates there, which in turn attract those that want to maximise returns on investment. This in turn increases interest rates and a tendency for money to return to the strongest economies and away from developing economies. A vicious
example here in New Zealand relates to the price regulated electricity network companies can charge. The Commerce Commission allows them an acceptable, increasing rate of return, which includes inflation and market discount rates rising. This attracts capital from elsewhere AND means our prices will go up through a reinforcing loop effect. (Inflation feeding inflation) while overall, attracting money to New Zealand and negatively impacting developing
Stag-flation - a name for another type
of possible risk
Stag-flation is the term that describes the condition where-by an economy
is simultaneously experiencing inflation and recession or nil economic growth. This condition is particularly challenging and may be a paradigm shifting moment for an economy. Exploration of the kind of shift this situation might trigger is beyond this week’s edition, other than to say that we would be seriously re evaluating the sufficiency of the current economic and financial system at this
Energy is a key input, and we can't
just make more of it
Let's not forget that humans don't create
energy...we never have. All we do is use existing stored forms of energy (oil, coal, gas) or harness real time sources (hydro, wind, thermal) There is much debate about the role of energy as it might contribute to increased costs in future. If energy (at the rate at which we use
it) is finite because of extraction costs and limits to the quantum of renewables and emissions that can be utilised, we may well be looking at steep price increases for energy in future. In the meantime, Oil and Gas producers are enjoying increasing prices and profits in the existing market, without investing in future production.
China may constrain future supply (for
China may be yet to experience the full impact of Omnicron. It has
avoided mass transmission through strict control regimes, but if there is a significant breach then it may be that economic throughput is reduced or halted for a period. This would see a slow-down in exports and perhaps we will see some empty spaces on our shop’s shelves. Would that matter?
“The answer to high prices is higher prices” which in theory leads to behaviour change and creation of substitutes, alternatives, or altogether new options for consumers. This of course assumes we need to continue a consumption growth
trajectory or that we need to consume as much as we do currently, which is very debatable (we advocate for absolute demand reduction)
The scene does seem to be set for what might be a dramatic shift in innovation that drives efficiencies, reduces product obsolescence, manages whole
of product life cycle costs, including emissions and ecosystem impact, (which is likely to be increasingly costly or taxed in future) in response to generally rising prices and regulations.
Cost lowering and ecologically better solutions are likely to be treated increasingly well in future.
Government’s helping hand – A start in
New Zealand, or part of the problem?
Reducing tax on fuel and subsidising public transport to the tune of 50% is going to help those that have very tight budgets in the very short term, but isn't it just kicking the can down the road when it comes to getting off our addiction to fossil fuel? Why not keep the price of fuel high and subsidise public transport 100%?
The flip side of Govt handouts, is the groundswell of new regulation coming through aimed at reducing emissions, waste, and negative environmental impacts, while increasing recycling and
reuse. These are very likely going to increase inflationary pressures by adding new costs and redistributing the burden of transition in new and untested ways. Perhaps this is just the true cost of transition and the way we should be doing
Ironically, this is on top of the inflationary pressures which were created by government in the first place, through the creation of new additional money. In addition to this it (the Govt) may also be looking to increase tax of the well off, while providing relief to those in poverty (Eg Goods and services tax off food has been suggested)
And if things really get tough, we have in the past had regulated prices for basics such as milk and bread, this could happen again. Fuel and other scarce resources were rationed through WW2 years.
Ideas for reducing our own exposure to
increasing costs through transition:
- Take on the fact that our decisions over the coming few years are critical to what happens in future – Spending, voting, community action - will all make some
- Re-think what we have always done – lifestyle, habits and priorities can be changed (Do we really need the latest iPhone when the existing one will do? Or maybe find a more economical
- Re-think values – Eg is ‘Keeping up with the Jones’s’ really that important?
- Share resources – Community hubs, carpooling, equipment sharing
- Repair, recycle, re-purpose existing assets and equipment
- Educate ourselves and those we influence on options for reducing cost and impact. Some young folks may not have experienced really tough conditions - lets look after
- Buy local and support the retail system we need for the future
- Use public transport and support the transport system we need for the future
At the end of the day, reducing our exposure to increasing costs is going
to be a positive step in the right direction, while making use of only the resources we need - in the best possible way forward.