Economy

On The Threshold Of A New Era Of Global Inflation

Rising prices in the developing world will eventually usher in a whole new paradigm on global currency markets.

A market in Bangalore
Frank Stocker

BERLIN - You have been hoarding money. You purchased real estate. You’ve invested in Swiss francs. All of this you've done to stave off the spectre of inflation, because we've watched how national banks have been printing money for years, as never before.

And then last week the European Central Bank announced that record-low interest rates would be staying low for years to come. In the opinion of the many currency depreciation prophets out there, that means that sooner or later we’re looking at a second 1923 -- an era of hyperinflation, and we’ll soon be using billion or trillion Euro notes. The problem, however, is this: the presses have been churning out money for five years now, and there’s been no explosion in prices, not even a little. Inflation, experts tell us, simply is not coming.

Or is it? Signs have been multiplying that prices could in the not-too-distant future start going up; that the days of extremely low inflation rates are over; that the value of money could start going south very quickly. So the people who’ve been warning about all this for the past several years would turn out to be right: even if they continue to be totally wrong about the causes.

National bank policies don’t have anything to do with it. The reason lies elsewhere.

For about 30 years, rates of price change in the western industrial nations have been on a downward spiral. Initially they were held down by the national banks that set themselves clear anti-inflationary goals and maintained a tight grip on money supplies, keeping them deliberately low.

They were thus able to slow depreciation down drastically. The average inflation rate in the industrial nations in the first half of the 1980s was nine percent. Twenty years later it had gone down to two percent.

And 20 years later – at the latest – another crucial factor started playing a role: the integration of 1.5 billion people into the global labor market. Most of these workers were in China, which became a member of the World Trade Organization (WTO) in 2001, but workers in other developing countries were also a part of it. The opening up of borders and the liberalization of world trade made it possible for companies to move production to wherever it was cheapest.

End of an era

In 2010, Swiss economists tried to calculate in concrete terms just how big the resulting price pressure was. The result: when China gets a one percent share in any given European market, production prices fall by five percent. This figure is particularly high because China exports many labor-intensive goods. For all the developing countries together the figure is on average lower – around three percent. But the impact of this has been that the inflation rate in Germany between 1995 and 2006 fell by about 0.7 percentage points per year, the authors of the Swiss study estimate.

"That phase is now ending," says Alfred Roelli, chief investment strategist at Pictet, a Swiss asset and wealth management bank. He explains that the deflationary effect of China's boom is over because salaries in China have climbed dramatically in the past few years. And that will prove a lasting trend, not least because the number of Chinese in the labor market is going down.

The one-child policy introduced nearly 35 years ago is now exacting tribute. When the number of workers dwindles they are in a position to demand higher salaries. That means that salary-intensive sectors like the textile industry have long been moving production to other countries like Bangladesh, Vietnam and Cambodia. China has a population of 1.3 billion people, whereas all three of the other countries together only have some 250 million.

But just how would the 30-year phase of sinking inflation rates actually come to an end? If globalization impacts prices by even as little as 0.7 percentage points, that would put future price rises at 2.7% instead of 2%. Where’s the problem with that?

But inflation is not linear: prices don’t go up parallel just to developments in supply and demand. Inflation happens much more inside heads. "As soon as expectations change, inflation just explodes, prices are raised in anticipation of it," says Roelli.

Bond time-bomb

It is a kind of domino effect that in turn sets off a spiral of ever-rising prices: I’m raising prices because everybody else is doing it.

This process is not about to start today or tomorrow. It could happen in three, five, even ten years. And whether inflation rates would be four, six or eight percent -- nobody knows. But one thing is certain: it would have major consequences for the financial markets. Just as inflation dropped over a 30-year period so too did yields in the bond markets, which means that for three decades investors have been earning handsomely on bonds.

If inflation rates rise sooner or later yields will rise. That would mean the end of an era on the financial market. And it would be all the more dramatic as nearly all professional investors in life insurance, pension funds or investment companies only know this dynamic of the financial system.

Very few financial pros active today were working in the 1970s. So they would all have to learn how to deal with a new investment world. The same holds for small savers and private investors. Longer-term bonds, both government and corporate, would turn out to be money losers. Companies would find it generally harder to get hold of capital, they would have to pay higher interest and higher salaries, profits would shrink along with the prices of their shares.

At the end of the day, gold and real estate might become winners again, even if the reasons will be very different than what most inflation prophets assume now.

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Ideas

Reading Rumi In Kabul: A Persian Poet's Lesson For Radical Islam

Born some eight centuries ago, the famed poet and philosopher Rumi offered ideas on religion that bear little resemblance to the brand of Islam being imposed right now in Afghanistan by the Taliban regime.

The work of 13th-century poet Rumi still resonsates today

Mihir Chitre

Among the various Afghan cities that the Taliban has invaded and apparently "reclaimed" in recent weeks is Balkh, a town near the country's north-western border. Interestingly, it was there, about 800 years ago, that a man called Jalal ad-Din Mohammad Balkhi, better known as Rumi, was born.

Some see the grotesque exhibitionism of the Taliban advance as a celebration of Islam or a "going back to the roots" campaign. As if followers of Islam were always like this, as if every willing Muslim always propagated austerity and oppressiveness. As if it was always meant to be this way and any shred of liberalism was a digression from the quest of the religion.

In fact, a look at the history of the religion — and of the region — tells a different story, which is why there's no better time than now to rediscover the wisdom of the poet Rumi, but without doing away with its religious context.


In a world where Islam is a popular villain and lots of terrible acts across the world in the name of the religion have fueled this notion among the West and among people from other religions, it's paramount that we understand the difference between religion as a personal or spiritual concept and religion as an institution, a cage, a set of laws created to control us.

Why do you stop praying?

To begin with, and largely due to the film Rockstar, the most famous Rumi quote known to Indians goes like this: "Out beyond the ideas of wrongdoing and rightdoing, there's a field. I'll meet you there."

Rumi's original Persian verse, however, uses the words kufr (meaning infidelity) and Imaan (meaning religion), which was translated as "wrongdoing" and "rightdoing." To me, the original verse surpasses the translation with a vital, often missed, often deliberately forgotten, interpretation, which is to highlight the fact that there is humanity, love and compassion or a certain kind of mystical quality to life beyond the concept of religion and that is the ultimate place, the place where Rumi invites us to meet him.

It would be incorrect now to read this and think of Rumi as irreligious. In fact, he was quite the opposite. But his interpretation of religion was personal, spiritual and not institutional or communal or exhibitionist.

In one of his poems, translated by Coleman Banks as "Love Dogs" in English, a man who has stopped praying to God because he never got a response meets "Khidr," an angel messenger, in his dream:

Why did you stop praising (or praying)?

Because I've never heard anything back.

This longing you express is the return message.

To me, through this poem, it's clear that Rumi advocates for a personal relationship with God. In fact, he goes on to say that being true to God is to long for his validation or nod, that life is longing.

A copy of Rumi's spiritual couplets at the Mevl\u00e2na Museum in Konya, Turkey

A copy of Rumi's spiritual couplets at the Mevlâna Museum in Konya, Turkey — Photo: Georges Jansoone/Wikimedia

Don't sweep the history of Islam with the broom of radicalism

For those familiar with the European literature of the 20th century, I could say that this echoes the ideas of Samuel Beckett. But remember: Rumi lived 800 years ago, at the heart of what we call the "Muslim world." To equate Islam on the whole with repressiveness and hostility, as many of us do today, might just be a criminal contradiction then.

It's also interesting to note that after the Quran, Rumi's is probably the most widely read work in the Islamic world, which suggests that Rumi's ideas, which may sound too progressive for anyone remotely associated with Islam in today's world, have, in fact, been accepted and cherished by the Islamic world for centuries. Sweeping the whole history of the Islamic world with the broom of radicalism wouldn't then be the fairest assessment of either the religion or of radicalism.

This physical world has no two things alike.
Every comparison is awkwardly rough.
You can put a lion next to a man,
but the placing is hazardous to both.

(From the poem: "An Awkward Comparison")

It's tragic that the Taliban has ravaged the same place with their own power-hungry, totalitarian interpretation of the religion which once produced a mind that embraces it with wide arms of warmth and peace and refuses to be compared with other followers of the same.

How to cure bad habits?

It is vital for us to separate groupism or communalism, which often escalates to barbarism, from the thought it is based on. It is vital then to read and reread that what Rumi sees as religion is the private association with God. It is also vital to mark the emphasis on individuality in Rumi's thought.

All the Western ideas of liberalism are based on the idea of individuality, which in turn is based on post-renaissance European thought. Asian philosophy is contrasted with its Western counterpart in the fact that it is rooted in mysticism as opposed to individuality.

Islam itself has long had a tradition of mysticism that is known as Sufism. Sufism is a sort of an inward dimension of Islam, a practice that encourages a direct, personal connection with the divine, a spiritual proximity to the omniscient that transcends the physical world and temporarily subverts immediate reality.

Sufism is the quest for the truth of love and knowledge, without necessarily always distinguishing between the two. Rumi was known as the Mevlana (Maulana) and his poetic collection Masnavi meaning "the spiritual couplets" is known as the Persian Quran. He was no doubt a mystic, a Sufi, and one who strongly endorsed the personal, for the most intimately individual is the truly spiritual.

Rumi might remain unparalleled in not just the Islamic world but also in the world of philosophy and poetry across the globe. Another thing that he will remain is dead. The Taliban, on the other hand, at least for now, looks rampant and alive.

It is now up to us, the other people who are alive, and the ones who are going to be born — not just Muslims but everyone else as well — to choose which interpretation of Islam we uphold or react to, how we read history, and what we borrow from it.

How to cure bad water? Send it back to the river.
How to cure bad habits? Send me back to you.

(From the poem: "My Worst Habit")

I think what we, as a world, need now more than ever is to be sent back to Rumi.

https://thewire.in/culture/re-reading-rumi-in-the-time-of-the-taliban
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