Now that we set the stage in the previous posts, let me go back to that personal experience regarding inflation. (Listen the podcast post here)
I told you how that there can be a gap between what the average statistics tell us officially and what people actually feel. I was reading a blog post by a blogger named Michelle who depicted how inflation had affected her personal finance. I invite you to read that post because it is a perfect illustration of what I was developing in my previous posts. I could be pulling all kinds of text book explanations that would bore you to death and dilute the effect of your understanding, or I can invite you to expose yourself to tangible experiences like the one that Michelle is describing in her own post. Of course, her description is already 3 months old and a lot has happened in between. So it would be crucial if Michelle could share an update with us. However, despite the fact that it is 3 months old, it only confirms how important it is to rely on personal experience. That’s the power of blogging.
Having said that, now I want to get back to that historical review that I promised from the very beginning. I promised also to make it as straightforward as possible and not to lose you in convoluted technical explanations. That bird’s eye view of historical context is what will allow you to learn about the past to understand where we stand in the present moment and predict where we are going in the future. It’s an essential building block of your understanding. If you want to understand inflation, you need to realize the larger context of energy and the history that underlies it. And blend it with the prism of personal experience. And that’s what I am planning to do in the next few minutes.
We live in a world that’s deeply addicted to oil. Everything you see, use, consume is derived from oil, from the packaging that wraps your food or electronic appliance you just bought, to that tooth brush you just used to make your mouth cleaner. From the food on your table to the painkiller pill you may have used for that headache. Every single calorie you consume daily contains a multiple amount of oil.
So it makes absolute sense to realize that climate change and the need for an energy transition will not make that current inflationary tensions just a temporary phase that will pass. It’s won’t be back to business as usual once this COVID crisis is all over.
So it makes sense for our historical review to focus on oil. And let me starts with 1973. I could start a lot earlier with very good reasons, but I was not born in these previous phases and I promised I would only talk about what I personally witnessed. So in 1973, I was barely a teenager at that time and all I can remember were these long lines of cars at the gas stations. Oil producers had started an oil embargo as a result of the Israel-Palestine conflict. It literally quadrupled the price of oil in the 6 months that followed the October 1973 decision taken by the 12 OPEC members. Few years later, the Iranian revolution started and was followed by the Iran-Iraq war that lasted 7 years. I could give a whole lengthy list of factors and explanations about the geopolitics of these times. I happen to have spent the whole period from 1984 to 1990 in the Arabian-Persian Gulf. And I have been following that region very closely since then with regular visits in there.
However, what I always like to do is to maintain a bird’s eye view in order to stay in touch with the main arc of the history that was at play then and that continues up to our present days. It’s the history of oil and money, and more practically, the history of inflation, which is the topic of our study here.
Sometimes, I like to make reference to movies. They have that ability to detach your attention from those siloed categories of understanding. I have found that a good movie will use a story or a fictional character that very often connects me to an understanding that I would not have accessed otherwise. One of these movies that perfectly applies to the period we are covering from 1973 to 1982, is called “Rollover” with Jane Fonda and Kris Kristophersen. It’s a love story between the widow of a magnate (Jane Fonda) who inherits a fortune left by her father and an ambitious banker, Kris Kristoffersen. Behind that love story, hides a fantastic description of the world as it stood at that time. It is a perfect depiction of economic dynamics that even textbook economic books in business or economics graduate programs did not even provide at that time. I can say it because, none of my courses in business school, and none of the text books in economics described it as perfectly as what that movie was about. In that movie, one of the characters says a sentence that summarizes hundreds of pages of economic theory. Just like Rumi’s ability to help us grasp a reality about inflation, that one sentence provides us with a deeper sense of the economic reality that was at play at that time, and not a single analyst, commentator, journalist was aware of that time. Again I can say it, because I witnessed that period, both right there in the Gulf area and later in the investment banking world. I’ll let you watch that movie by yourself and come to that understanding by yourself.
Looking forward to hearing your thoughts. Leave your comments below and I’ll reply.