What’s behind global inflation and where are we headed?

The year 1996 saw the publication of Roger Bootle’s provocatively titled book The Death of Inflation, which argued that inflation was no more the threat it used to be and fixation with keeping prices low can hamper growth unnecessarily. The book is a compelling read. Yet, the challenges brought about by the pandemic may be in conflict with the optimism in it, as reflected in Bootle’s own columns and interview.

COVID19 did not just catch the global health infrastructure off guard, but wreaked havoc on the world economy as well, particularly in terms of ushering in an era of intractable inflation. Here’s a look at how the infection jumped from person to person, eventually subduing the economy, and throwing demand and supply into a nagging imbalance.

The demand side: The virus and the price of your groceries

Faced with sudden outbreaks, panicking governments the world over were left with no choice but to swallow the bitter pill of lockdowns. It was clear that there was no alternative, at least in the short run. The policy helped control the contagion, but not without business closures and job losses. This, in turn, raised a natural question: how to help the common person muddle through the crisis with the economy at a standstill?

Almost all economists favored economic stimulus—financial help from the government channelled through the fiscal and/or monetary policies—but answers to how, how much, when, and where varied drastically.

Most governments around the world offered one kind of stimulus or another. Yet some countries with the highest stimuli—say, Canada, Germany, Spain, or the United Kingdom—are now experiencing record inflation.

Inflation in the United States, the country with perhaps the largest stimulus packages, has hit a 40-year high, with prices this March being 8.5% higher than March last year. This has meant the average household having to spend nearly $327 more per month than they used to, a year ago.

After all, if one gets up one fine morning and finds a serendipitous check at their doorstep, which literally happened in the U.S., sooner or later, they are going to go shopping, i.e., demand increases. But the neighborhood grocer has limited items, i.e., supply remains the same. More people running after scarce goods made the prices rise, as it does. This effect was worse in service industries, where some businesses even had to pack up.

Arguably, the stimulus packages, while helping the economies recover, perhaps also created conditions for high inflation by encouraging consumption. While stimuli may be more conspicuous in the advanced economies, almost all economies offered some kind of stimulus, swelling their fiscal deficits, as governments increased spending to make up for the fall in economic activity.

The supply side: The rising costs of production

Yet, to fault the economic stimulus for inflation would be somewhat simplistic. Many economists expected such inflation to be transitory—short-lived—after all. Transitory, it could have been, if it hadn’t been for the surge in the price of oil.

Note that COVID19 had initially caused inflation because of the sky-rocketing costs of shipping, supply chain disruptions, erratic demand, and international business desynchronization due to asynchronous outbreaks. Economic activity had plummeted, sending oil demand—and its price—into a free fall.

One of the reasons the oil price fell is that oil supply is relatively “inelastic” in the short run. That is to say, oil companies cannot cut down on oil production suddenly. These are giant enterprises with fixed, long-term costs. As demand vanished due to the virus—and supply could not suddenly be scaled back immediately—oil flushed markets, and oil price fell drastically.

This should have made everything cheaper. But as economies recovered, often with a sharp, V-shaped recovery, thanks to the vaccines, the demand for oil rebounded phenomenally. So much so that even though the world economy still has not fully recovered from the pandemic, oil demand may have already surpassed its pre-pandemic levels.

The resurgence in oil demand—with limited supply available—made the prices skyrocket, from a record low of minus $40 per barrel at the start of the pandemic to around $120 per barrel now.

Yet of course, this rise is not without the added conundrum of Putin’s war on Ukraine. Supply disruptions due to the war, with the added effect of sanctions, and now an embargo, have worsened the spike in energy, both oil and gas, prices, given the fact that Russia is among the top three producers of crude oil, and the second largest producer of natural gas in the world.

In addition, uncertainty brought by the war has affected investment and financial markets the world over. Stock markets have been bearish. Businesses are having to look for alternative trading partners. These factors, along with higher oil prices, are making costs of businesses soar, leading to “cost-push inflation”—higher prices arising from higher costs of production.

The outlook is not good as yet

Together, resurgence in demand after quick initial recovery, and a fall in global supply due to higher costs of production, have translated into an indomitable surge in prices the world over. Turkey has seen prices rise by 70% between April 2022 and April last year.

The corresponding figure for Argentina stands at 58%, and for Venezuela, Sudan, and Lebanon, at over 200%. While inflation in these countries may not be attributable exclusively to the above stated factors, as these economies were already stuck in macroeconomic blues—sometimes trying their luck with unorthodox policies—the pandemic and war have complicated things considerably. Even in advanced economies, the IMF estimates a 38-year high record inflation for the current year.

Average incomes, in turn, will grow only modestly this year, as reflected in the world GDP forecasts being revised over and over again. While growth in the oil-exporting Gulf economies forms an exception, as they are benefiting from higher energy prices, even those will not be immune to food inflation, considering 85% of their food comes from imports.

But the outlook for the developing economies is particularly concerning. They are facing capital flight as investors opt for higher return in the advanced economies, where interest rates are rising, pushing the indebted countries closer to default. This will further pressure stressed currencies, worsening inflation, with more countries having to knock the IMF’s door, sooner or later. Calls for international financial institutions to take a more helpful role to help the distressed countries are, understandably, increasing.

Likewise, devising a careful policy at the national level may be crucial to people’s livelihoods. It may be argued that governments need to prioritize fighting inflation over showcasing economic growth. A blind pursuit of growth would lead to higher demand and translate almost inevitably into more inflation.

As for the micro level of managing a household, it may be just prudent to adapt our spending patterns to the disheartening reality of deep-seated inflation, and perhaps spare a few bucks to help those in distress. Inflation isn’t dead, as yet. But the world needs a healing touch, now perhaps, more than ever.

(Published first on Politics Today, June 6, 2022)

Of gun ownership, psychological health, and being American

The next mass shooting in America is expected to happen in less than 13 hours. That is what 457 incidents by 29th of August, 2021 translates to. This is horrifying.

Yet, as dramatic as it may seem, a graver threat to America comes from the mass shootings that are to likely in the longer run. The momentum that these attacks are building, and have been building on, has largely been ignored, but represents a much grimmer menace.

The underlying causes of mass shootings have become so saturated within the society that they cannot be distinctly identified anymore. Because they’re elusive, institutions and policies that perpetuate such proclivities are even harder to pinpoint and galvanize support against.

When the focus should be on building a better society for future generations, we don’t seem being able to agree on even how to save lives today.

Gun-ownership levels set the US apart

The substance of even more immediate policy gets lost, more or less, along partisan lines. Republicans, who overwhelmingly support lax gun-ownership laws, tend to put the onus on mental health. Former President Trump had gone so far as to say, “Mental illness and hatred pull the trigger, not the gun.”

But consider this. The US is estimated to have the largest number of firearms per person in the world. Even more remarkable is how much the US figure at 120.5 per 100 exceeds even the 2^nd highest country in the list, Yemen at 52.8 per 100, which is a country in the midst of civil strife and war. 

Roughly, every 4 in a 100,000 people die in America from gun violence. That makes a US citizen a 100 times likelier to die from gun violence, than a British – the rate in UK being 0.04 per 100,000.

Yet, even as the frequency and intensity of the shootings have been on the rise over the last few decades, people’s attitudes towards gun-ownership, on average, are still changing only very slowly. According to a Pew survey, as recent as 2019 (latest), 80% of Republican voters said it was more important to protect gun owners’ rights than to rein in gun ownership.

It takes a lot of effort and at least some pretence to say that there would have been as many killings in America if Americans had fewer guns on average. Unrestrained gun-ownership is elephant in the room.

Lagging behind on psychological well-being

Still, gun-ownership is not the only explanation for mass shootings, even if most democrats would be inclined to believe so. Mental health, which the more left-leaning voices cautiously avoid blaming – on rather passionate grounds that it could stigmatize those facing psychological challenges – is nevertheless associated with violence, and America’s situation here is again concerning.

According to a survey of 11 high-income countries by the Commonwealth Fund, every fourth American is diagnosed with a psychological health condition. Moreover, almost half of the respondents reported they had experienced emotional distress due to neighborhood safety concerns, or not having enough money for housing and/or food – an alarming statistic, considering America is the most resourceful country in the world by overall GDP levels.

Even with this state of psychological health, and one of the highest rates of suicide among the industrialized countries, the US compares unfavorably to other high-income countries on the number of professionals working in mental health.

Thus, the problem is way bigger than the precious little legislation in some states on ‘background checks’ for assault weapons manages to capture.

Which one is it?

In a world of complex interactions, a witch-hunt for the absolute fundamental determinant of violence is as naive as it is useless. What is incontrovertible, nevertheless, is that gun ownership levels in the US are not normal for a normal country – and shrugging it off as a byproduct of a sacrosanct ‘gun-culture’ could turn out to be yet dearer in future. Mental health issues, too, are at an alarmingly high level without the required infrastructure for support.

Both of these are problematic. Both need immediate redressal to bring them more in line with a level befitting a country with such massive resources as those of the US.

Yet, it’s already quite late. Gun-ownership may be restricted, but the guns people already have – including assault weapons – cannot be taken away. Mental health may be invested in, but it will be a challenge to pull the society out of such pervasive challenges to psychological well-being at large.

What’s worse, gun ownership and mental health could be interacting in far more complex ways than any research has been able to discern so far. In short, measures taken even today will take a long time to have any effect.

Where do the shootings originate?

But even such measures would be essentially dealing with only the somewhat superficial mechanics of the problem. The underlying causes of mass shootings cannot be identified without reconsidering the contours of social justice in the American society today.

Why is it that the wellbeing in one of the richest countries in the world has not kept pace with economic growth, even as corporations have thrived? While the common person struggles to survive, politicians are in a state of disconnect, essentially being a hostage to groups that enthroned them. It is the special interests who determine who is to get what from the pie, sprinkling peanuts of micro-choices here and there to delude the masses into an illusion of liberty, and even the lure of ‘Americanism’.

There is nothing American about settling for a mass shooting everyday. There is no liberty in not being able to choose to live. If anything, there is an incentive for those who design the frame of our choices to conflate constructed, imaginary ideals with ‘identity’.

If the corporate world can make assault weapons a part of consumption culture, and go so far as to conflate arms-ownership with national pride, elevating guns to becoming a definitive symbol of the American ‘identity’, undoing this formidable milieu is going to take a strong will and a perspicacious strategy as well.

Given the deep-set polarization in American politics today, breaking the categories will take long. Reimagining justice seems, unfortunately, quite distant. 

A distressed, hate-filled mass shooter is planning his attack somewhere, meanwhile. He knows he is short on time.

(This article first appeared here, on Politics Today).

Coffee Extinction Is Nature’s Way of Telling Us: “Heal the World, Now!”

We have not known coffee for very long. Most accounts take us only as back as the 15th century, when it was first used by the mystics of Yemen. Yet, coffee somehow got the lion’s share of blame in many conspiracies around the world. Attempts were made with varying level of success by those who valued order over thrill to get it banned in the Ottoman Empire, Persia, Sweden, and Italy.

Now, the sublime beans seem to have had more than their due share of trouble, and are calling it a day.

Scientists have warned that 60% of the species of coffee are at risk of extinction. Out of 124 known types of coffee species, we actually use just two for our beverage: Coffea Arabica and Coffea robusta. But Arabica, the most popular one, is in trouble too.

Most of the species facing the risk of extinction are not used for making coffee. But even those must be conserved, scientists say, for cross-breeding and production of more resilient new varieties, which are sensitive to climatic threats.

While coffee will not disappear anytime soon, the quantum of the problem is significant. Ethiopia, the original source of the enigmatic beans, is still the largest African exporter of coffee. But 60% of the land that is used for coffee production there will become unsuitable by the end of this century.

A very nice-tasting species of coffee, the Coffea stenophylla, was seen in December 2018 for the first time since 1954. This was only a single plant, in an area that itself, scientists reported, was threatened by human encroachment and deforestation.

Rising global demand

According to experts, while global coffee demand is expected to double by 2050, at least half of the land used for coffee production may become unsuitable by then.

Even though a higher demand may support price in the short to medium run, we will actually be pushing the planetary boundaries in the longer run beyond what the Earth can sustain.

In the absence of appropriate support mechanisms, a higher demand will lead to a greater environmental stress, that is worsened by a warmer planet. Challenges to coffee production may increase in scope, as well as intensity, over time. The need to strengthen and augment the coffee ecosystem is urgent.

Anatomy of environmental stress

Human-induced climate change, diseases and pests, and deforestation are some of the reasons why certain species of coffee are already under threat.

Take Costa Rica, for example, where farmers are leaving coffee plantation in favor of orange production due to erratic weather, and more storms and droughts. This has meant an increase in the cost of the production of coffee. On the other hand, farmers find oranges to be more resilient in the face of climatic threats. This must be a difficult decision in a country where people feel a deep connection between Coffea and who they are.

But the damage from climate change does not stop here. As a result of the hotter climate and increasing rainfall levels, fungi such as the coffee leaf rust (Hemileia vastatrix) and pests like the coffee berry borer (Hypothenemus hampei) are appearing in areas that were previously free of them.

Meanwhile, growers in other areas, like Australia, which represents a potential substitute area to the more conventional centers of coffee production, lament less-than-usual rainfall, due to changing weather patterns.

Even if rainfall were optimal, Australian coffee is less environmentally stressed otherwise, and therefore, has 10-15% lesser caffeine. Caffeine production being a defense mechanism, a less stressful environment means less caffeine.

It, therefore, seems like there is also an optimal level of stress at which nature thrives. However, instead of respecting such subtleties and the intricate forces of balance in our world, we revel in the excesses that we cheer as the era of mass consumption.

Danger to livelihoods

As we see these problems from a distance, we may be tempted to conclude that there is still enough time to act and that appropriate measures will probably prevent something as extreme as coffee disappearing from the planet.

Yet, for those whose livelihoods depend on coffee, the question is rather irrelevant. For them, the coffee either stays feasible, or has to be replaced by some other crop as soon as possible. The falling prices of coffee worldwide have made things even more difficult, especially for smaller farmers.

Already 40% of coffee farmers are estimated to be living below the poverty line. Small farmers owning less than 5 hectares (12 acres) of land account for two-thirds of global coffee supply. They are not only poor to begin with but cannot compete with big producers in mechanization, automation, or cost-effectiveness.

Compare the small producers, with the big producers of Brazil, for example, which accounts for a third of global coffee production. Owing to greater sophistication, big Brazilian producers can produce more at a lower cost.

This is bad news for smaller farmers. When the overall production in the world is high – sometimes driven solely by Brazil – the price falls. This, again, effects small farmers disproportionately, who are producing at very low profit margins already. When the prices are too low, it is not unusual for them to have to sell below cost.

At the end of the day, poorer farmers may end up producing lower quality beans, at a higher relative cost, and not being able to incorporate more sustainable agricultural practices, like soil enrichment.

The result is that these farmers are trying to switch to other crops where they can. But switching to other crops is not a costless process, and may not always be a success. The disturbances from climate change and an erratic pricing system, have resulted in psychological health problems in poor farmers ranging from anxiety and depression to suicide.

Healing the world

The indifference of the world to the raging inequalities is heartbreaking. As we grab a $5 cup of coffee, on the go, we should think about the farmer who must have worked for 48 hours to make the same amount of money.

At the very least the world needs a mechanism to ensure a fair price to the coffee farmers, as their already challenged livelihoods are disrupted by the environmental footprint of the richer world. The richest 10% in the world account for more than 50% of global carbon emissions, after all.

So, where are we right now?

The Fair Trade movement is said to be helping farmers with a “fair” price. But even they admit that a price higher than what they are able to offer would be more desirable. Starbucks claims to procure 99% of its coffee “ethically,” where they have data going down to the name of the farmer who they bought the beans from along with the price (which they do not disclose publicly).

Others call for the key role of greater transparency in paying farmers, with some companies even mentioning the price they paid the farmer for the coffee clearly on the package. While these measures are worthy of recognition, they are more like first aid to a broken system that perhaps needs a much more drastic solution.

As for the search for more resilient strains, big investments are needed from governments and coffee companies. Many such trials for “future-friendly” coffees are already underway.

Yet arguably, the coffee’s endangerment is part of a bigger problem. The world leaders need to take responsibility for global environmental problems and devise an enforceable and credible mechanism to punish deviances.

Human-induced global warming is perhaps the central threat endangering coffee’s diversity. Extinction, in this perspective, is nature’s way of telling us, that all is not well. Manic consumption, obsession with profits, the disregard for the environment, and the inequalities plaguing our world actually have a cost. If it continues, nature is telling us, it will not continue.

As I sip my coffee and write from the comfort of my cozy room, climate change seems somewhat distant. The coffee farmer, who provided the beans for my coffee, meanwhile fights a battle for survival – her crop was ravaged by an unexpected storm.

(First published in Politics Today, here)

Understanding Policy Rate

LET’S say, I am a fruit vendor, and the only one in the village. There is only one kilogramme of apples left in my shop. I am about to go home. A person comes to my shop and I sell the apples for Rs100.

The next day something weird happens. A smuggler’s briefcase splits open, and money starts dropping to the ground from his plane all over the village. It’s evening again, and again I am left with just 1kg — but today, there are many buyers. I sell the apples for Rs200.

Here, apples are the total production. The money that the buyer had in the first instance, Rs100, is the money supply. When you increase the money supply — notes falling from the plane — it leads to higher prices, because of higher demand. Economists call this inflation. Note that the total number of apples — GDP or production — does not increase.

One of the better known instruments for dropping money from the plane is lowering the policy rate. Simply put, it is the benchmark rate set by the central bank at which loans would be given. When this is lower, the commercial banks also charge a lower rate for lending.

Thus, if you wanted to buy a bike, but the bank was charging an interest rate of 20 per cent. You might have been dismayed. But then the benchmark — policy — rate falls to, say, 2pc. You rush to the bank and borrow money to get the bike.

But here is the catch. When you reach the bike company, they tell you that the price of the bike has increased significantly. You ask why. They tell you there are so many people who want a bike now, and they have limited bikes. The prices go up.

Thus, a fall in policy rate leads to increased prices. It does notmake people richer. People have more money, but the goods became more expensive too.

Governments, businesses, and the ‘more patriotic’ economists, almost always support a lower policy rate. They want ‘indigenous’ growth, instead of borrowing from external sources or relying on foreign investment.

Lowering the policy rate can indeed lead to growth in the short run, as they argue. If the economy is in recession, there is idle capacity in the factories. When you lower the policy rate, not only does the demand increase, but also the production. The factories will utilise their idle capacity and make more bikes to catch up with the increased demand. More people want bikes, but there are also more bikes now. Welfare increases.

But in an overheated economy, with high consumption and inflation, and no idle capacity in the factories, the opposite is true. Lowering the policy rate, does not result in more production — as factories are working to their maximum potential already — it results in greater inflation. Having more money, more people want a bike, but the factories have already reached their limit.

Thus, the economic activity generated by the lower policy rate may be illusory, translating to higher inflation, rather than higher production. Perhaps all spells of hyperinflation in history began because governments myopically kept raising the money supply in the hope of more and more growth.

Also, demand-side decisions are simpler. A lower policy rate almost automatically leads to increased demand. But supply-side decisions are complex. Investors and businesses will likely not invest in a bad policy environment or during hard times such as a pandemic. Thus, a lower policy rate may translate into more demand but not a higher aggregate supply.

The point here is not to advocate a higher or a lower policy rate, but to advise caution. Beware of a person — an economist, a journalist or business tycoon — who comes on television to declare an exact figure for the policy rate off the cuff.

The State Bank did a decent job in stabilising the economy, res­toring confidence, stea­d­ying the rupee, and bringing down core inflation. Had Covid-19 not struck, the budget for fiscal year 2020-2021 would have been expansionary. The PTI could well have showcased growth.

But things did not go as planned, and the government wanted to do something rather quick. The high food inflation right now is perhaps a consequence of the authorities taking the sugar millers, flour millers, the middlemen, the retailers, and many other groups head-on without doing their homework. In essence, it is an issue of governance, and again the State Bank cannot be blamed for not being able to dent inflation. It brought core inflation down significantly.

In short, the State Bank raised the policy rate when the economy was overheated and prices were soaring. It brought it down to support the economy when the pandemic struck. But determining the optimal policy rate is a complex decision. It involves intricate models, simulations, and calculations, even if with some judgement. That is what the State Bank is there for. Let it work.

(First published in Dawn, here).