May 17, 2011
The Cold War may have been over for a quarter century, but the inflation-driven challenges that characterized that historical era are heating back up.
After the Berlin wall fell 25 years ago, global economies benefited from two major influences, Malmgren told an international audience of financial advisors last week. One was the large pool of eastern European workers who entered the job market, which brought down wages worldwide. The other was the peace dividend, which permitted western governments to spend less on defense than they would have had the Soviet Union remained intact.
Today, global volatility is back, according to Malmgren, who said that commodity-driven inflation will lead to political instability in emerging markets.
“Those risks are back on the table,” she said.
Malmgren spoke at the annual CFA Institute’s annual investment conference held in Scotland last week. She is the president and founder of both the Canonbury Group and Principalis Asset Management, financial firms based in London. From 2001-2002, she served as financial market advisor to the White House and on the National Economic Council.
Let’s look at the inflationary forces Malmgren expects will imperil the economic recovery and their implications for investors.
The drivers of price increases
Inflation can arise despite the deleveraging and demand destruction that has characterized economies over the last several years, Malmgren said. Commodity price increases are leading the way, she explained, and they are being driven by capital-intensive businesses that need access to the credit markets.
Farmers, for example, rely on credit to purchase seed and other raw materials. Their lack of access to credit during the financial crisis caused seed sales for companies like Monsanto to collapse, Malmgren said. In the absence of decreased demand, supply shortages across the agricultural production cycle have led to higher food prices.
Mining is similarly capital-dependent, as are other extractive industries, including oil production. Many of the marginal suppliers to the extractive industry went bust following the crisis, leaving those who were left standing positioned to raise prices.
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