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April 20, 2011

Why Changing Living Standards Around the World Measure Inflation

How do you measure inflation? Is the high standard of living enjoyed by the Western world in decline, draining away to the rapidly growing countries of China and India? Larry Cyna, Cymore Fund, wrote a thought provoking analysis of the thesis that wealth and high standard of living is flowing to Asia. Here is a quick excerpt with a link to Cymor Fund blog at the end:
Inflation is not to be measured by traditional metrics, but rather by the changing living standards around the world, and the changing GDP of major country influences around the world – in essence the drop in economic standing of the US and Europe, and the unstoppable move forward by China, then overtaken by India.
Loewen & Partners hosted a event last week in Toronto where Dr. Michael Power of Investec Asset Management gave a presentation. Dr. Power is a noted advisor to Hedge Funds and travels extensively giving presentations internationally to Hedge Fund managers and others. His presentations on current trends and matters of interest are widely followed and respected. He pointed how US debt and changing demographics were inexorably shifting power and influence to China and then to India. Essentially I agreed with his presentation.The Unpredictability of Predictions: My first response to anyone who is a futurist, or who has the ability to spot major trends, is to thank him for the insight. However, I also have a theory that is proven by history. “What we as humans will never master, is to predict with accuracy the future.” Recent events, sometimes described as Black Swan events, are a vivid example. Who could have imagined that government surpluses of a few short years ago in the US, would turn suddenly into massive deficits that everyone is running in fear of? 
The inevitability of the inevitable is flawed: Interest Rates. While in an overall sense, I cannot disagree with the thesis, there is also the effect of interest rates. We currently live in this delusional world where we think that inflation is something that can be controlled by government. Governments have many tools, but the total control of interest rates, continues to elude us. Once the Genie is let out of the bottle, interest rates have a way of running away ahead of all attempts to restrain them. The result is a massive shift of wealthThe speaker felt that this massive shift would inexorably be to the new Eastern economies. However another way to look at the issue, is that the massive accumulated reserves of the new Eastern Economies, would be reduced in value by 20% in a single year, if inflation was 20% for that entire year.

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