Preface: “Time is the greatest commodity” ― Sunday Adelaja
A Primer on Inflationary Business Conditions (Segment V)
A respected appreciation of the foundational importance of planning properly for future capital investments can sometimes only be a distance management consideration for entrepreneurs during inflationary periods. At the onset, inflation results in an optimal economic and business opportunity, with long project backlogs combined perhaps with myopic optimism. What is often too ambiguous when the arrival of inflation is visible, and rightly so, is that it is directly impacting future financial capacity and future costs of capital investments for both individual and business.
When considering the almost forgotten and distant memory of the 2008 economic malaise and Great Recession, some experts say the real cause was an inflated residential housing price. Therefore, a deflated bubble led towards lower costs resulted in a complicated financial short-circuit of sorts leading to an economic recession. For those entrepreneurs who experienced those 2008 business adventures and subsequent recovery processes, it is noteworthy to say that the 2020 continuing Covid-19 induced financial implications will require the best of economic planning and management to avoid similar or more prolonged industry implications.
Yet, the financial world has successfully survived challenging scenario’s for decades. Before the 2008 banking concern, most of us do not remember vividly Arthur Burn’s 1974 reassuring scenario statement, “the entire financial world can breathe more easily, not only in this country but abroad” after the decisively successful action required during the Franklin National banking malfunction. For those unfamiliar with Franklin National, it was one of the world’s largest banks in the early 1970s. The CFO John Sadlik, along with the bank’s management, made critical undercalculations of marginal financing costs. A profuse zeal for top-dog status combined with other incremental principle compromises brought elevated financial fears to the entire global economy.
The solution? Only a $1.75 billion loan from the Federal Reserve to the member bank, along with regulatory assistance, reassured investors and delivered renewed confidence back to the global financial system. A satellite consideration of growing millennial acquisition concern with rising residential interest rates ( certainly not above 4.00%!) should make evident that absent subsidized future interest rates either through government programs or a general disconnects with inflationary market impetus, the financing of future capital investments, albeit new homes, or commercial buildings may have hoisted selling prices from rises in raw materials and perhaps wages.
Therefore, with the probable principal cost increase factors with inflation risks, absent other considerations, what square footage, and subsequent lifestyle, will be variably affordable at potential interest rate ranges? Secondly, what is the solution to maintain a stable managed velocity of money to drive needle RPMs up on the economic engine and prevent a de-ja vu of the 2008 financial malaise?
The prior year’s rapid increases in commodity prices since Q1 of 2020 should provide warranted general concern as to the future affordability or financing cash flows of any necessary capital investments from automobiles for freedom lovers to housing for main street occupants. Additionally look at agriculture prices and it reflection on future food costs. Is 20% a modest assessment of these price and cost increases in the prior 12 months? This does not mention the higher cyclical prices of corresponding future business investments of manufacturing equipment, facility, and infrastructure costs, or the land for such capital expenditures.
The now distant horizon of financing considerations of these future inflated infrastructure prices (equipment, buildings, machinery, land, or transportation assets) are often not front-loaded. Ultimately, in a hypothetical economic future, if the above described inflationary increases lead to runaway or hyperinflation, the deeply furrowed-brow results and societal implications are described well with Tennesse Ernie Ford’s words, “You load sixteen tons, what do you get? Another day older and deeper in debt.”