Marie Antoinette’s notion wasn’t all that half-baked

Happy New Year and I sincerely hope it is a good one — for all of us. Around this time it is customary for economists to write about what the new year might hold, as if a collective new year’s resolution can have an impact on the economic or business cycle. The economy doesn’t work like that.

The annual forecast should always be taken with a salt cellar because why should we think that the Roman calendar has anything to do with the economic cycle? The economic calendar and the annual calendar are two totally different things.

In fact, there are two distinct times: there is calendar time and there is economic time. They are not the same. The economic time, better known as the economic cycle, can take years (as we know here too well), while the official annual year takes a measurable and pre-ordained 12 calendar months. Consider this recession and the ludicrousness of linking economic time to calendar time. The recession started when people didn’t expect it and it has lasted longer than most people feared. It was not dictated or influenced by, in any way, the calendar as we know it.

As a result, why should we think that because the 31st of December leads to the 1st of January, this transition from one 24-hour period to another has any impact on the economic cycle? Sure, companies make decisions that are based on a calendar year, but the economy only responds slowly and it has never, ever, been the case that a 12-month period has ever accurately captured the ebb and flow of any economy. In economic time, no one fires a gun at midnight on New Year’s Eve.

This is why annual budgets and targets are so risky for governments because they are trying to relate one thing, the economic cycle, to another thing — the Roman calendar.

Therefore, at this time of the year the only thing the economist can do is try to alert the reader to one or two big trends which are already in the ether and might affect the way the economic experience impacts on different people.

Using the word ‘experience’ when discussing the economy in a downturn might raise a few eyebrows but curb your indignation for a second. By experience, I mean the way the ‘economy’ affects people individually. There is no unique economy, nor is there a unique economic experience that we all share. The way the economy plays out and how it affects you is based on thousands of variables, which no one can pre-programme.

This brings me to one of the huge or mega-trends which will affect us all this year. This mega-trend is that things are getting more expensive for poor people, while things are getting cheaper for richer people. Or, more accurately, the things that poor people spend relatively more of their income on are getting expensive, while things that rich people spend relatively more of their income on are getting cheaper. There is deflation for the rich and inflation for the poor and this is an extremely worrying development.

The reason for this is that the world is split in two. There is deflation and recession in the rich world, but there is still a boom going on in the emerging nations, like India, Brazil and, of course, China. Clearly the emerging markets are now suffering the fallout from what is happening in the US, Europe and Japan, but when you have huge demand coming from countries where there previously was very little, the global price of certain items goes up.

The main items affected by the extraordinary surge in emerging markets are food and energy. One thing we do know is that the first thing to change when people get rich is their diet. In emerging markets the demand for meat and milk has gone through the roof, driving up global food prices in certain areas. These are staples for people in this part of the world. So poorer people in Ireland have seen food prices rise because of the demand from the Chinese middle classes for our diet.

One other major impact of surging demand and production in the emerging markets has been the rise in fuel prices. This obviously has had a greater impact on poorer people because poorer people spend more of their smaller incomes on fuel.

This mega-trend will continue even if there is a setback in growth in China (as I expect) because these long-range changes take time to manifest themselves and take years to fully be appreciated.

In contrast, think about very rich people in Ireland who are already wealthy and have preserved this wealth in the downturn. For them the deflation, in very expensive houses for example, is an opportunity. It means that they can buy these assets right now, if they want to, for a song.

They can also buy all sorts of upmarket, leisure gadgets much more cheaply relative to what they were years ago because Chinese competition is keeping the price of these things low and pushing them lower.

So the ‘leisured’ class — the already wealthy — are seeing a fall in the price of goods which they spend relatively a lot of their cash on, while the poor are seeing a rise in the price of the goods that they spend relatively more on.

And this price divergence is being driven by precisely the same dynamo: the two separate global economies.

If this price divergence happens and goes unchecked, things can get very volatile very quickly. For example, we know that higher food prices were one of the catalysts for the Arab Spring, which is reaching a horrible denouement in Syria.

But if you really want an example of how diverging prices for the rich and poor can affect history, spare a thought for Marie Antoinette. When she allegedly declared that the peasants should ‘eat cake’, she was only offering an observation on deflation for the rich and inflation for the poor. Towards the end of the monarchy, Paris as a great cosmopolitan city became a centre for all sorts of fancy bakeries servicing the very rich.

As a result of this intense competition, the prices of fancy cakes were falling in Paris, despite the fact that the price of bread for the poor was rising. This was because the upmarket bakeries were eating into their margins to remain competitive and to increase their market share amongst the very rich.

So it is entirely plausible that poor old Marie Antoinette was only relaying her own experience — not so much with absolute wealth but with relative price movements.

As mega-trends go, this divergence between deflation for the rich and inflation for the poor is extremely dangerous. After all, we all know what happened to Marie Antoinette.

Happy New Year.