Tuesday 05 Dec 2023
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This article first appeared in Forum, The Edge Malaysia Weekly on July 4, 2022 - July 10, 2022

A few weeks ago, I watched the latest instalment of the Jurassic World franchise, Jurassic World Dominion (JWD). I loved it, enjoyed it, would 100% watch it again. Repeatedly. Who cares that, at the time of writing, JWD sits on a Rotten Tomatoes rating of 30% and a Metacritic rating of 38%? I don’t. If Hollywood makes a thousand Jurassic movies, I’d watch (and love) a thousand Jurassic movies. But upon watching JWD, it struck me that the movie and its predecessor, Jurassic World: Fallen Kingdom, provide a great analogy for our global inflationary woes today. Let me explain.

JWD follows the characters from the first two chapters of the Jurassic World franchise as they figure out how to adapt to a world in which dinosaurs now live freely alongside humanity. At the end of the second chapter, Jurassic World: Fallen Kingdom, a character named Maisie Lockwood essentially presses a BIG RED BUTTON that releases a whole bunch of dinosaurs into the world. These dinosaurs are of a variety of species, including herbivores, omnivores and carnivores. Lockwood does this to prevent the extinction of these dinosaurs from poisonous gas in the basement of a gigantic mansion. (I’m not saying the plot makes sense, I am saying I enjoyed the movies!)

Thus, JWD deals with the after-effects of Lockwood’s decision. Much like Pandora releasing a bunch of physical and emotional curses into the world from her box, by releasing these dinosaurs into the world, as opposed to keeping them caged and trapped in a theme park or in the basement of a mansion, Lockwood’s choice forever changed the world. Some consequences can be imagined, many more cannot.

What does this have to do with inflation? Well, the release of the dinosaurs into the world — and their ability to procreate, some even asexually — is very much akin to the massive monetary expansion from quantitative easing in developed countries, particularly the US, the eurozone nations and Japan, since the global financial crisis. The analogy is even sharper when you realise that the reason the dinosaurs were in a mansion in the first place was pure profit; they were about to be auctioned off to the highest bidder. This unchecked global liquidity flooded global markets, giving us a greatly extended bull run but at some point, the chickens had to come home to roost.

Easy monetary policy since 2008 has seen a wide range of consequences. A full description would fit multiple books, so I am not going to pretend that I can adequately cover it in this article. But, among others, we saw the rise of asset prices — equity markets and property are salient examples — around the world, coupled with a desire to keep kicking the can down the road on unwinding this ongoing monetary stimulus. Inflation, at least as measured by the Consumer Price Index (CPI), remained low, giving central bankers — particularly the US Federal Reserve — room to maintain monetary expansion.

Asset price inflation, which, for the most part, does not translate into the consumer basket (except for property) ran wild. We know of the bull runs in the global equity markets, particularly in the US. But the private equity and venture capital booms are part of the story as well. With so much liquidity, companies and start-ups saw crazy valuations, with incredibly high multiples. The fact that start-ups are a big part of the story of the past decade is in no small part due to the fact that there was so much dry powder among private equity and venture capital firms. This then allowed for further distortions in the global economy such as in consumer markets, with companies burning cash on marketing, discounts and much more to acquire customers.

From the perspective of evaluating the valuations of these companies over the past decade or so, we need to be especially careful now in attribution. Are the fundamentals of these companies so sound and their promises of future growth and profitability so strong that they deserved the valuations they got, despite never once making profits? Or, was it also mixed in with the fact that a rising tidal wave lifts all boats? It is probably some combination of both, but we can’t ignore the tidal wave. And when the tidal wave lands, we can see which ships or boats were actually hardy and which ones were not.

We know also of the effects on inequality. Asset owners made out like robber barons of sorts in the past decade, cashing in on asset price inflation. However, those who did not have the requisite capital to invest missed the boat entirely. This widened the gap between the haves and the have-nots, which also contributed to the rise of populist politics globally. Indeed, it is difficult to imagine how politicians today can unwind the pressure of populist politics amid short-term electoral cycles, now that the dinosaurs are out of the basement. For instance, are politicians really brave enough to retract subsidies or handouts that their treasuries could finance at lower interest rates? Of course, the rise of populist politics wasn’t solely due to global monetary policy, but global monetary policy since the global financial crisis played an important role.

To be fair, many analysts have long wondered when a global recession and a global bear market would be imminent. With Covid-19, real economies shrank due to Covid itself, lockdowns and other such policy measures. But the financial markets still performed well. Even in a world where we lose the assumption that finance is meant to be an intermediary for the real economy and treat it as an end in itself, it is a clear indicator of a bizarro-world system when financial markets and the real economy are correlated, but in the opposite direction.

But now, we have a perfect storm. Inflation has got out of hand in the US at levels not seen since the 1980s, prompting the Federal Reserve to hike interest rates with further hikes to come. A recession is becoming even more likely. The same is true in Europe because of the war in Ukraine, which has exacerbated food and energy inflation. China’s economy has slowed significantly due to its zero-Covid policy, and while unwinding the policy will undoubtedly lead to a growth rebound, we should not assume that it is automatic and instant. There will be scarring, as we have seen in Malaysia, and companies may have already been trying to relocate their supply chains away from China. Putting it all together, the global distortions from easy monetary policy over the last decade can no longer be solved by continued easy monetary policy; this perfect storm requires painful decisions.

The animal spirits or, in Jurassic parlance, “dinosaur spirits” of the past decade will be dampened by global monetary tightening. For those who wonder whether this is temporary and a return to “normalcy” of the 2010s will occur, it is worth remembering that the 2010s were anything but normal. Negative interest rates and extended bull runs in that decade are the anomaly, not the norm. Perhaps the world is currently transitioning to some normality of sorts. 

But like JWD, the dinosaurs are out and we can’t put them back in the bottle. We have to live with the consequences of the decisions of an elite few. Whether the dinosaurs or their decisions ultimately devour us all remains to be seen.

Nicholas Khaw is an economist and head of research at Khazanah Nasional Bhd

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