Inflation, Deflation & The Dreaded Hyperinflation

In today's episode we look at why prices have been rising so much in recent years. We also look at why falling prices, or deflation, can be more damaging then you think. Finally we look at hyperinflation in 1920s Germany when money died.

Warning: This podcast does not constitute financial or tax advice.  Please contact a financial advisor or tax advisor to discuss your own individual circumstances, taking into account your needs and objectives, knowledge and experience and financial situation.

Transcript

SPEAKER_01 0:01

Welcome to Cash Lads. My name is Paul Malloy from BoxcoverTax.ie and this is Marcus Doyle from Clear Financial. We're here to take the mystery out of money and finance with some history, some stories, and plenty of humor too. How's it going, Marcus? How are you getting on today? I'm good. Good stuff. Good. Very good. Thanks. Very good. Thanks. Um, so today we're going to talk. Um, we've all been experiencing prices going up. You know, whether it's it's it's it's a pint, whether it's it's food in the in a s in in the supermarket, wherever it happens to be, we're all feeling that pinch, you know.

SPEAKER_00 0:44

Yeah, I think I think people are really noticing these days because of the prices where they were from five years ago. All the kind of your your norms such as you have to get everything, milk, butter, that's all gone up massively. So I think people really have noticed it now, especially because food because you have to eat.

SPEAKER_01 0:58

Yeah, no, absolutely you do. You do. And and one of the things that you know not everyone may be entirely aware of is that from I suppose the mid-1990s up till about 2020, um those 25 years, China's you know, impact on the world in terms of you know their ability to make things at good quality at low prices kept our prices in general low. Uh we may have had parts of you know, parts of of our spending was was was was higher, but it was compensated by the kind of the China factor. So for for all those years, prices were very, very low. And so we had gotten used to prices really not increasing much at all. One percent, maybe two percent a year. And on top of that, uh because prices were so low for so long, um, interest rates were so low for so long. Nearly at zero. Nearly at zero. And and so, you know, when interest rates are that low, borrowing is is cheap stroke, you know, easy, whatever way you want to use it. And if I'm looking to borrow money to to buy you know an apartment, say, and the the interest on the loan is like two and a half or three percent, I'm I'm all in, like, you know, I'm saying that's a great investment. But let's say the interest goes to seven. Now I'm thinking, whoa, that's a lot of money I'll have to pay back. And and that'll get reflected in the price of the apartment. If interest rates go up, it actually drives the price of property down because it's more costly to borrow. And there's less less amount of people willing to take that risk. Less people, exactly. It's just it's kind of just less, less is the word, just over the over the economy at two percent. We've got lots of bidders pushing the price up at seven percent, much less.

SPEAKER_00 2:43

Yeah, it's just like the the Irish property crisis at the moment. There's so many people bidding on everything now, it's just like small properties that shouldn't be worth that much are now worth a fortune.

SPEAKER_01 2:54

Yeah, we we we have a we have a lack of supply in Ireland. I I I personally my feeling is that it's it's wages are very, very high in Ireland right now. I think that's for me, that's a bigger factor. Internationally, that's a very, very big factor. But you know, supply, if there's no supply, you know, clearly that's going to push prices.

SPEAKER_00 3:13

And certain people have certain funds set aside, which are pushing the people who are just obviously a bit saved, but can't go above a certain value because their mortgage is a certain rate, and it's the unfortunately they get they get pushed to the side.

SPEAKER_01 3:26

So that's that's where we are, and less than there was two other factors that that were so so uh the war in Ukraine that's the one that people kind of associate with. We we saw that war on our screens like like it is today, but back then it was you know the war was everywhere.

SPEAKER_00 3:42

And the big one was um because Paul couldn't get his brand new car, there was a certain park made for cars in Ukraine, and all the car sales were like just basically stalled.

SPEAKER_01 3:51

Absolutely, and in Ukraine are one of the biggest exporters of wheat in the world, so the prices of food, particularly Ukraine used to kind of sell a lot of food kind of outside Europe to kind of North Africa and places like that. Um that the the the rise in those prices because of the war had had a huge effect and and COVID, you know, you just talked about it there, like COVID had a massive effect. Because, you know, if you're looking for a bit of you know nickel for you know your rechargeable batteries, for example, like Indonesia is the biggest supplier of nickel in the world, it's absolutely miles ahead of everyone else, it's a big country, but you know, um if you if the if there's a you know a lockdown in Indonesia and nobody can work in factories or nobody can do any of the production work to get to get the nickel out, um, then maybe you have to go to Australia, which is maybe more expensive, and that's what pushed a lot of prices up of things of goods, uh, push them up. So there that you know, we had some some things colding down inflation for a long time, and now it's kind of back, and we're experiencing three, four, maybe, maybe more. And you know, historically, this isn't an unusual position. The unusual position was actually what the way things were when interest rates were very, very low there for 20-25 years. What we have today is actually much more common, and central banks are very mindful of inflation, and it's really their job to tackle it because at 2% is just it's it's a target they tend to have. It's and we'll get into the reasons why they would not want it to be less than two, but two is the number that two percent is what they what they like. And you know, from 2022, with you know, you know, COVID, with the with the with the war, uh, with the years of low interest rates, sending kind of price prices upwards in general, you know, Jerome Powell at the Federal Reserve and and the people there, they very skillfully over time brought inflation down with just slightly higher interest rates without hurting the American economy too badly for us. Well slight increases to kind of ease it in. Yeah, I mean, for all for all that you know, Trump says that you know that they were that it was crazy. It wasn't like you know, they did a very skillful job. And uh and you know, Joe Bo Joe Biden's administration, I think, managed the economy pretty well. But the price of eggs, that was the thing after the election when Kamala Harris was, you know, completely walloped um by Trump. Um, that was the thing that people were talking about in America that dictated their decision. They just noticed that the price of ordinary things had gone up, and that I think even in Ireland recently there's been a shortage of eggs.

SPEAKER_00 6:31

Was there a shortage of supply? Because you go it was kind of like back in COVID times where people were panicked buying, but you'd go into the shop like, where are all the eggs gone? Yeah, I think it was down to supply. Was there less suppliers in Ireland of eggs or something like that?

SPEAKER_01 6:44

There there could there could have been, but the the refrain price of eggs really was a kind of an inflation. You know, my my decision was financial. You know, I I voted for Trump. He's gonna bring eggs down, I can make my cake cheaper. And that that that that that uh that did for uh that did for Kamal Hart. But you know, to to to go back to that 2% target, why not zero or why not less? Wouldn't it be great if prices were lower? Well, in Japan in the 1990s, after their property crash, this is what they had. They uh found themselves through policy choice for other reasons with look prices below that were falling, falling prices, which is known as deflation. And it sounds great, but you know, God, the prices are going down. That's that's fantastic. But you know, if you're gonna buy a couch, it's like a major decision, spending decision like that, the couch is five grand, and you think to yourself, it'd be five percent cheaper next year, you don't buy the couch. Because you still have your old couch. You still have your old one, it's really not that bad. It's not it's not a necess necessity. It's not it's not an it's not a necessity, and the the price decision is going is sending you the wrong way. Whereas if if you know the price is going to be two, three percent higher, but you you're not saying that. You're saying, well, it will be it's more expensive in a year and kind of need one now.

SPEAKER_00 8:00

Yeah.

SPEAKER_01 8:00

So so I'll buy one now. And if we go back to the the couch shop, which which is all these the you know, the the owner and the staff looking out at all these people that are walking by and not coming in, and the owner's looking at the staff, thinking, I don't need these three people. Yeah, maybe I need one, maybe put one on part-time, let one go. Um, and this has a terribly negative knock-on effect because if you lose your job and you're on social welfare or you're relying on savings, which is you know scary, um, you stop spending.

SPEAKER_00 8:32

And you're contributing to the economy both tax and in your spending aspect.

SPEAKER_01 8:37

Just buy the essentials. Yeah. Accommodation food, that's it. Yeah. And all the other businesses we have out there, they're not all accommodation and food, they're other things. Yeah. And that's where it really, really has a knock-on effect. And this kind of negative zombie-like economy where every year people are buying a little bit less, you know, the Japanese threw money at this, they did everything they could. They kept interest rates low, they went negative at one point. Um, they the government uh, you know, pump primed, you know, spent money on infrastructure and all that. It just didn't work.

SPEAKER_00 9:12

They just when you get into that cycle, it's very hard to Yeah, you think with all the things in the government that they would knock themselves out of it, but obviously, yeah, that was the first time we've discussed on this before, but that was the first time I heard of deflation, it was all about Japan. Um, but it was kind of like the concept was when we were young that well, they have everything they want, they didn't need to buy anything else. That was the kind of generic answer for it all. They had they had their their CD pair, their video pair. I don't know if D V Ds were out at that stage. Um, but I was but you you'd think the a bit like as you say, the way the European Central Bank or the Federal Reserve in America can do certain stuff and influence it, you'd think they're about to knock knock out.

SPEAKER_01 9:52

It's hard. I I I still I I it's something I really must uh must explore it.

SPEAKER_00 9:56

Uh but this isn't this. Well, maybe it was it a cultural thing as well, because in Japan, the cultural thing does affect it as well.

SPEAKER_01 10:01

Well, what what after after the after the property crash, um the Japanese were very, very reluctant, their banks were reluctant to to write loans off uh because that was a sign of failure in itself.

SPEAKER_00 10:15

Yeah.

SPEAKER_01 10:16

But by not doing that, by not calling in these in these loans and just you know ripping off the band-aid, if you like, um they stopped making new ones, stop making new loans, and all they're just trying to do is manage what they have, they're not doing any new business, they're just managing the truth which is not making them any money. No, because that these companies worked, you know, particularly if they were developers, gone, you know, never coming back. Yeah, so that was that was you so shame, I suppose, is a big thing. And none of us like it, of course, it's awful, but I mean it's it's a big, big thing, and they just couldn't do it. And it was really, and I I I would imagine the Chinese uh Europe and America are shameless. Well, certainly America, which we talked about before, the bankruptcy laws are much, much more lenient. It's like, you know, just get this person out of debt and get them spending, get them back and make money. Um, and I think the Chinese and the Chinese are very good students of of of of the fate of of other countries, um, and they might have the best relationship with the Japanese, but uh they are beginning to experience some deflation themselves, and they're worried. They're worried as well. Like, you know, so it's it's it's pretty bad. I mean, one of the one of the biggest examples of this was uh the first Great Depression. So people think you say, when was the Great Depression? You say the 30s. There was a depression from about 1873 to 1896, which is 23 years, quite a long time, where prices of like back then, you know, wheat especially, but agriculture and mining were the two probably two really big industries in America, and the prices of um wheat, especially just year after year just went down and down and down and down and down, and the price of their debts didn't. They still owe the same money. Um they're producing more wheat, or there was less demand for wheat, or they just weren't getting the price. They weren't getting the price, and I think I think definitely the the railway system would have had an impact on that because it was moving product all around the country quite quickly.

SPEAKER_00 12:19

And whereas if you're in California and you couldn't ship it and this guy kind of really needed it, he would pay the price.

SPEAKER_01 12:27

There were parts of the country where the price of wheat actually differed quite a lot. It's hard to believe now.

SPEAKER_00 12:32

But it was just that's what so the railroad made it well, it's a bit like the free trade in Europe and made all the guy down, he can produce it cheaper, he'll get buy it off him. So obviously that affected the price then. It did stick it on a on a on the railway and send it up to me.

SPEAKER_01 12:48

Yeah, I mean back then there was you know these major countries that all in the late 1870s, you know, 1880s, people were jumping onto what was known as the gold standard, and that meant that you were on gold and you had to maintain your your currency and you couldn't just go spending money to get your way out of it. And then gold became a real kind of you know restriction. It was like a you know, like a noose around people's heads. And um, there was a famous um um Jennings Bryan, he was the Democratic candidate in 1896, but he said, You shall not place uh you know a crown of you know a crown of gold or thorns on people's head, you know. So this metaphor of gold killing people and with the image of Jesus Christ as well and on the cross and all that uh a crown of thorns. And uh amazingly, in the late the 18 1895, 1896, they found a ton of gold, especially in South Africa, and all this extra gold sent prices, price, you know, the price of gold down, and the price of food went up just in time for McKinley to win the election in 1896, which was incredibly fortunate timing because he was going to lose that election. Um, but we might just move on to hyperinflation. Now, this may be something you might have seen when you were in school, might be a word that you've seen in a while, but hyperinflation as a definition or the standard definition is when prices rise by 50% or more each month. That's absolutely crazy, isn't it? So your pint is is is 5 euro one month, 750 the next, 11 the next. Yeah. So um it's when prices just get utterly out of control. And probably it's kind of like end of days type stuff where it's like where people are are desperate. Money dies. Yeah. Money dies. It really dies. And and this um this happened in uh most famously, probably in Germany in the in the early 1920s, when Germany had lost the war, um, and it was required to pay reparations, uh, which is like a f you know a penalty for for for the damage they'd done to France and Belgium, especially. And the uh the Germans were very bitter about this, and uh it was a real source of source of anger, and it really hurt the Weimar government with their credibility that they that they couldn't get out of it. But the Germans had placed heavy reparations on the French in 1871 after the Franco-Prussian War. So in you know, they they had kind of started. The French wanted to get them based in Revanch Revenge, uh, as uh as the French uh Prime Minister name escapes me. So um we had this kind of you know bizarre situation where Germany had no money to pay reparations, France and Britain owed America tons of money from World War One because they borrowed heavily in World War I. So the Americans gave the money too. If you follow the money here, if you could see a map of the world, it'd be funny to watch it. But just imagine just all these dollars flying over the Atlantic to Germany. Germany gives it to Britain, France, or Belgium, and the money goes back to America, and the money goes back to America. It's like the old ships bringing all the product around from uh well, we won't get it into the whole slavery of the trade, but it would be the slave trade went from from Liverpool to West Africa to the Caribbean and back to Liverpool. So um, so this is this is what happened. I mean, Germany and Russia had essentially their strategy, financial strategy in World War I was I guess we better win. We'll never we'll we'll if if we win, we'll get the losers to pay our debts, you know. Uh which is effectively what Britain and France have done. So the um the Germans decided that they'd make one reparation payment to the the to their to the Brits and the French. And they decided, well, you know what, we're not gonna do that again. So they refused to pay. And um in revenge, or under the conditions of the the uh the treaty of Versailles, uh France and Belgium uh invaded the Rohr, which is the western part of Germany where all the manufacturing is done. And um the Germans told their workers, don't work for these guys, we'll pay you. And this is kind of the moment when that kind of deliberate move to screw the currency uh got got out of hand. And we had a situation where the prices of things were rising so fast that workers were being paid every day.

SPEAKER_00 17:21

That's mad.

SPEAKER_01 17:22

Every day, so they would run out at about eleven o'clock. Imagine that the person on payroll absolute nightmare. Poor Eamon McMahon, we know I'm sure Eamon wouldn't have had uh enjoy that much, and he didn't have all the systems he has these days. So so the the the chap who was working there and typically was was was men rather than women, would would run to the gate, the factory gate, hand his wages over to his wife. Wife wouldn't run to the shops and buy them by buy what she needed before the price went up that afternoon. Um there was a uh a thing where instead of paying for a meal at the end, people demanded to pay for their meal at the beginning because the price of the food is only going to go up higher, and the drinks go up higher. There was a lady who uh had a one of those wicker baskets, yeah, and she had a load of money stuffed into it because she was going down to to buy things. She'd forgotten something, she went back into her house, she came out, the money was there, the basket was gone. So the thieves had stolen the because the money was worthless. Because the money was worthless, and you know, this is this is what happened. And suppose in some ways Germany kind of got their their wish because what they were trying to do was in protest, they were trying to get uh the reparations re- re-examined, basically, to to say we can't but we can't pay this stuff. Yeah, it's been dead for for decades. So um, and that's ultimately what happened. The the the the mark, the German mark, which had been 4.2 marks to the dollar before the before World War I, was now 4.2 trillion dollars to one mark. And uh they brought in a a new currency called the Renton mark, which it things things things stabilized again. And there was the the Dawes plan of 1925, which was this kind of grand bargain or grand deal by the Americans too to fix the European economy and get the get the European economy going again, so again, they could buy things from American um American business. So, yeah, hyperinflation is not good. Um we'll um I guess Mark Marcus will talk, we'll talk again. We shall, yeah. Thanks very much, folks. Thanks for listening, and we'll catch you the next time. Talk to you soon.