Inflation is the single biggest economic challenge facing the world at present, in the eyes of Future Fund chief executive officer (CEO) Raphael Arndt.
During a panel session at this week’s ASIC Annual Forum, Dr Arndt acknowledged that inflation is easing around the world, led by the US and Europe.
“But we’ve got this backdrop now of a whole lot of inflationary headwinds,” he warned.
Dr Arndt pointed to a political dynamic being observed globally in which more and more populist governments are getting elected.
“The nature of these things is more populist governments direct capital, intervene in markets more – not always from a purist economics point of view – and therefore, they reduce potential economic growth and that’s inflationary,” he said.
This trend has emerged in countries such as the US, where Dr Arndt said that younger generations have had a very different life experience to their older counterparts.
“They have a different access to wealth. They have a different access to various types of life outcomes and they’re not very happy about that and they’re starting to exercise that at the ballot box in democracies,” he said.
“I think what we’re seeing in the US is an extreme example where different people in different situations are getting different life outcomes, and that country is saying, ‘That’s not good enough’ and it will be resolved eventually, let’s hope peacefully.”
Next year’s US presidential election, Dr Arndt said, represents “quite a dangerous point in history”. In particular, the Future Fund CEO highlighted reports that Donald Trump would seek to replace up to 25,000 senior public servants if he wins the election.
“That’s a legitimate right of a new government in that country that’s elected, but it will be a profound impact on the direction of what is the biggest economy in the world, the biggest military in the world, and that’s something we have to take seriously,” he said.
Decarbonisation, which Dr Arndt suggested is important not just for the climate but also for the national security of many nations, is also seen as an inflationary headwind.
“They don’t want to be reliant on importing oil from the Middle East or other countries. That requires a whole lot of capital, a whole lot of investment that, by its nature, is inflationary,” he explained.
Another headwind is the increasing cost of capital, with Dr Arndt noting that “every time a business decides to make an investment, they need a bigger return on that investment”.
“It’s not that, in the services sector, workers don’t deserve pay rises. It’s just that there’s a consequence to that if there aren’t offsetting productivity gains and so we need to have the bigger picture in mind,” he added.
At the same panel session, Reserve Bank of Australia (RBA) governor Michele Bullock said inflation will remain the “crucial challenge” for the economy over the next “one to two years”.
“For central bankers like Michele, here on my left, I think that challenge will remain, and even if inflation comes down, the history of other periods like this, if you look back over a few centuries, is inflation does go down again in response to these policy shifts but it can stay very volatile and so how fiscal policy works with monetary policy is important and how regulatory policy works is important,” Dr Arndt stated.
According to Dr Arndt, central banks such as the RBA have done an excellent job in responding to various crises in the past two decades.
“They’ve certainly helped us after the financial crisis avoid a depression, which would have been terrible,” he continued.
“But unless we go back to some sort of experimental balance sheet-type monetary policy, which doesn’t look like anyone wants to do that, then they’re only playing with the front end of the curve.”
In the US, Dr Arndt noted that it appears that fewer people want to buy long-dated government bonds given the size of the country’s deficit.
“That’s going to suck in capital from all over the world, and at the end of the day, large parts of the economy and asset valuations that ASIC regulates. Asset managers usually price off the long end of the curve, not the short end, so that’s something to watch as well,” he said.
