The Inflation Myth and the Wonderful World of Deflation. Mark Mobius

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David Byrne of the Federal Reserve and Carol Corrado of the Conference Board constructed a digital access services index that showed prices for internet services falling by 21% between 2007 and 2017 while the official price index for internet access showed prices rising by 4.5%.

      Another factor in the deflation phenomenon is the spread of global trade. Despite the trade war between the US and China, the fact remains that world trade is on the rise – with a pause in 2020 as a result of the COVID‐19 crisis. According to the World Bank trade grew from 39% as a share of the world GDP to 59% between 1990 and 2018. This explosion of trade resulted in global competition for lower production and distribution costs as well as a rapid rise in information exchange which spurred innovation and change. The spread of deflation covers the globe. When American oil men discovered a way to extract oil and gas from rock using innovative fracking methods, oil prices globally were driven down – even when their methods initially were more expensive than the production costs in Saudi Arabia.

      In this book I want to lay out the following ideas.

Firstly, inflation statistics are of immense interest to governments around the world because rising prices elicit a political response among their constituents. Governments often rise and fall on the perception people have about the prices of goods and services they consume. Therefore, governments try their best to measure inflation. In doing so, they simplify, generalize, and – in some cases – falsify or try to control the numbers by taking many actions, such as placing price controls on various products and services, so people are not aware of the actual price changes – leading to a black market and shortages.

      Secondly, the measurement of inflation is severely flawed; not because the diligent people who gather statistics regarding the prices of goods and services around the world are unqualified or unfaithful to their trade, but because they are not only shooting at a moving target – with prices changing up or down on a minute by minute basis – but also the very nature of the products and services they are trying to measure is continuously changing. The desire for simplification in constructing an index that will encompass the multitude of prices, and reflect the buying habits of the entire population, is a thankless task and one doomed to severe imperfections.

Thirdly, currencies, the measuring stick used to monitor price changes, have throughout history been debased by every authority that issued them. Many forms of currency have been tried: gold coins, silver coins, tin coins, copper coins, seashells, paper bills, and others have all fallen by the wayside as a result of debasement. Currencies are created by human beings, and thus can be degraded or upgraded by them to be worth more or less than the market believes. Thus, a unit of currency one day will be different in the eyes of the buyer or seller on another day. On that note: Throughout this book we use the word “inflation” but each time the word is used “currency devaluation” should replace it. So‐called “inflation” is really the loss in purchasing value of a currency.

      Fourthly, advances in technology and automation are leading to continuously falling costs for many goods and services. At the same time, every year a multitude of completely new and innovative products enter the consumer stage and improve people’s lives around the world.

      Finally, incomes in currency terms or the buying power of consumers change continuously, and, in fact, for most of history, they have tended to match price increases. Therefore, although it may seem that inflation is taking place for some products and services, they are actually getting cheaper in terms of the earning power of the consumer.

      If you take all of the above together I am sure you will agree with me that our understanding of inflation is to say the least flawed. I would even go a step further: In my opinion the concept of inflation is a myth, a legend, a fable, and, yes, a falsehood for a number of reasons. What we are experiencing today is, in fact, a deflationary spiral driven by innovation and automation. This deflationary phenomenon is here to stay and will continue to improve our standard of living. Welcome to the wonderful world of deflation!

      Note

      1 1 http://www.klenow.com/internet‐rising‐prices‐falling_Goolsbee_Klenow.pdf.

ACKNOWLEDGMENTS

      Special thanks to Anna von Hahn who gave invaluable help in editing this book and helping me to clarify many points. I would also like to thank my publisher, especially Gladys Ganaden for taking such excellent care of The Inflation Myth during the publication process. My books have always been in the best possible hands at Wiley. Last but not least, appreciation to Kelly Falconer for her great performance as my agent and also to Graeme Falconer for his support.

ABOUT THE AUTHOR

      Mark Mobius is a founding partner of Mobius Capital Partners. Previously he was executive chairman of the Templeton Emerging Markets Group and spent over 30 years investing in emerging markets all over the world. He received a PhD from the Massachusetts Institute of Technology. Mark is on the International Finance Corporation's Economic Advisory Board and served on the World Bank's Global Corporate Governance Forum as co‐chairman of its Investor Responsibility Task Force. Mark is the author of several books including: Invest for Good (2019); The Little Book of Emerging Markets (2012); Passport to Profits (1999/2012); Mobius on Emerging Markets (1996); The Investor's Guide to Emerging Markets (1994); Equities, An Introduction to Core Concepts (2006); Bonds, An Introduction to Core Concepts (2012); and Mutual Funds, An Introduction to Core Concepts (2007).

       www.markmobius.com

1 History and Inflation

My interest in inflation was piqued when in 2007 Argentina's director of consumer pricing, Graciela Bevacqua, at the INDEC, the official statistics agency, was fired for not being willing to falsify her agency's inflation statistics to satisfy the government led by President Cristina Fernández de Kirchner. The situation became a global incident when the International Monetary Fund (IMF) gave a report on Argentina to the IMF board which could have resulted in the country being censured and expelled from the IMF. The official Argentine data reported inflation at 10%, while independent data provided by as many as nine private agencies indicated that inflation was actually more than double that at between 25% and 30%. The government's efforts to keep the numbers low and fool the public were in response to rising prices that had resulted in mass protests against the Kirchner government. When IMF Chair Christine Lagarde said that if Argentina did not start producing reliable statistics, she would give the country a “red card,” Kirchner – speaking at the UN General Assembly – said: “Argentina is not a soccer team, it's a sovereign country and accepts no threats or pressures… In the game of comparing football with economics and politics, let me say that the President of FIFA has been far more successful and satisfactory than that of the IMF Executive Board.”¹ (Of course, that was before the FIFA Board was found to be engaged in rampant corruption.) In 2007, the Kirchner government not only dismissed Graciela Bevacqua, but also fined her and charged her with embezzlement. Graciela spoke out and claimed that her superiors had asked her to delete decimals from the inflation calculations. The American Statistical Association protested the persecution its colleague was facing in Argentina, but to no avail. Graciela was replaced. More of that case later.

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