Inflation has always meant flatulence. In the 17th century, the meaning of the word was expanded beyond blowing up of gas to include attitudinal derivatives as bombast and pomposity.
It was only a 100 odd years later that inflation focused itself on economic phenomena. Today, so many kinds of inflation have been invented that we do not even possess the requisite tools to measure them.
On the asset front, we are going through deflation, yet on the consumer front there is hardly any relief. In the West, asset prices seem to be running into the stratosphere, while millions of people are defaulting on their mortgages with again not much relief on the consumer front.
So what happens is that we stick to the classical definitions and measurements, which become vacuous and leading to false signals being sent. Western civilization used to limit itself to one South Sea bubble at a time.
A headlong rush
When it would burst, we would be severely chastened, waiting for it to settle down. Today, in the world of global finance, we run thousands of bubbles (both positive and negative) concurrently, such that when one stops, the system automatically creates a new one, and like lambs to the slaughter, investors flock to the “new, new thing”.
The current situation, in which governments stand as saviors of the last resort - given that financial marketplaces have never been capable of self-limitation, except through catastrophe - helps prevent calamities.
Vestiges of calm
What it also does is maintain the fiction that the current system is healthy, which clearly it is not. The distortive effects of financial speculation, which is the most inflationary of them all, creates the scenario where asset prices run away, even as the mainstream economy continues to bleed.
The irony of deregulation has always been that the more freedom business is given, the more dependent it has become on the government for being the savior of last resort… and often the only one.
Not a choice
Meanwhile, non-intervention hardly becomes an option either, for all of the catastrophe that it unleashes on the system as we are seeing in the SME sector as well as in real estate, hospitality and F&B.
Given that in the UAE there has been developments in the bankruptcy law, as well as relief that has been provided, what more can be done to stimulate the economy? Is it a question of just doubling down on relief measures, along with allowing for “re-zoning” of certain real estate?
Or are there more innovative measures available in the toolkit to combat the problem? Clearly, one of the central issues revolve around the issue of debt (both direct and contingent), and the fact that there is now the possibility of moratoriums being extended. (This also implies that banks are unwilling to extend any further relief as their balance-sheets come under pressure.)
Grace period
What is obvious here is that part of the resolution of the problem will involve the reassignment of debt towards equity. Either that, or some sort of extended repayment structures - already popular in the case of real estate through payment plans - seems to be part of the way out.
Abruptly, there has been a general feeling that things have changed, and a more responsible era has begun that allows for a more orderly building of wealth. What will be tested in the coming months is what this feeling is based on. And whether the reforms that will come will allow for distortions in the marketplace to disappear.
Debt and the cost of debt, which appears to be unreasonably high given the current level of deflation, will surely come under the microscope. Historically, whenever real interest rates have trended higher - as in the case of the Roman Empire circa AD 300 - society went into decline.
Common sense and empirical evidence tell us that high interest rates have nothing to do with production or growth. For SME sectors to regroup, it is this variable that needs to be restructured.
Which brings us back to Athens in the 6th century BC. Its ruler, Solon, kept a measured hand in dispensing justice and mercy as he restructured the economy, which was hijacked by self-interest and self-delusion.
In attacking debt levels and interest rates, his simple precepts set the stage for us to think about the modern economy and how to deal with issues such as debt, growth and wealth. More than any other kind, the inflation of self-delusion appears to be guiding the hands of Western regulators, where a more measured approach seems to be the order of the day if economic growth has to be rebuilt on firmer foundations.
- Sameer Lakhani is Managing Director at Global Capital Partners.
