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A Right Recruiting Newsletter, 2/2008
Most of you have no idea of how inflation can affect you and your career. The last real inflationary period we had in the country was the late 70’s and early 80’s. Paul Volker ended it in 1982 by putting us into the deepest recession since the Depression. Since then, inflation has been a non-existent or faint glimmer in your career and personal mirrors. But, inflation is insidious. If it re-appears, here is what you can expect.
In general, here is what happens in a period of inflation. Prices on almost everything increase 10% a year or more. The highest inflation we’ve had in the last 15 years was 4%. The difference between 4% and 10% may not sound like much. Heck, it’s only 6%, right? It’s not. It’s actually 250%. Prices will increase 2 ½ times faster in a 10% inflationary economy than in a 4% inflationary economy. You are now conditioned to think that electronics products, for example, will be cheaper every year. Imagine your decision making process if you know the longer you take to make a decision, the more expensive the product will be. People become more frantic during periods of high-inflation and savings plummets. You spend a lot of time looking for bargains. Financial decisions become more like a game than a thought process. Frankly, many people’s personal financial decision-making processes become goofy.
The best comparison I can give is mortgage rates. Do the math - if right now you think that 8% is an awfully high mortgage rate see how much more you will have to pay if mortgage rates become 12% or higher. If you bought a house in the last 10 years or so, think about how much less of a house you would be able to buy at 12% rates. Ouch!! This kills people starting careers and families trying to buy their first home.
During a period of 10% inflation, a 6% review and raise gives you a loss for the year. This affects people with more senior levels of experience more than junior people. Between your first and second years out of college, a 10% raise is feasible. Candidly, your productivity increases quickly because there is more to learn. Also, 10% of a lower salary is easier for a company to swallow. Your productivity between your 19th and 20th years in the workforce is unlikely to improve at a 10% rate and that 10% raise would be based on a higher base salary. In periods of high inflation, companies find ways to shed their more senior people. It’s economics.
Companies invest less during times of high-inflation. If you are a CEO sitting on a pile of cash and you can get 10% putting it in CDs, why fund a lot of capital improvements that may take years to pay off? You can look like a hero by doing nothing. Periods of high inflation reward corporate finance people and penalize technical people. Not only do people’s personal financial decisions become goofy, so do employers. Why take the risk of funding new products and ventures if inflation makes the future profitability of these investments cloudy? If you had to justify your capital requests to the tune of immediate 20% paybacks, how many would get approved? If your employer was not going to make significant capital or product investments, why do they need you? They can just hire another finance guy to manage their money rather than invest it in the business.
Unlike a recession, where the victims are easily identifiable because they have been laid-off, inflation hurts everyone. It’s not as public or as visible a pain because it hurts everyone at the margins. You are still employed. You just make less money every year because you can’t keep pace with inflation. It takes awhile to notice but once you notice it, you see it’s all around you. It is a grinding pain.
However, as bad as inflation is, both to you and your career, it gets worse. Inevitably, inflation gets stopped and, like 1982, it gets stopped by a recession. At least, that’s historically been the case. The longer and deeper the period of inflation, the longer and deeper the recession. That’s why the 1982 recession was much deeper than 1991 and 2001.
That does not paint a pretty picture. Imagine that you are going to spend 2-3 years losing spending power each year in a period of high-inflation immediately followed by a potential lay-off in a recession. That series of events could take 5 years out of your career. Hard to believe, isn’t it?
Actually, no it’s not. To anyone old enough to have entered the workforce in the 70’s, that’s basically what happened. You had 10 years of inflation, oil shocks and recession and then the cycle would begin again. You had recessions in 1973, 1980, 1982. In between you had periods where inflation was OVER 10%. The misery index was invented. Newspapers would publish a combined inflation and unemployment rate figure that was almost always 15% or higher, meaning a total of inflation and unemployment at over 15%. As a contrast, todays would be 7%. Not only did the 70’s give us some of the worst clothes (designer jeans for men, for example), music (Disco) and TV (Three’s Company), people lost the ability to have a career because they did not know what to expect in years to come, either from the economy or their employer. Frankly, in hindsight, people gave up. Every employer/employee or vendor/client relationship became a game to see who could gain the most short-term benefit. It was weird.
As bad as things sometimes get now, to most of us who remember the 70’s, we are still in Nirvana. The problem with inflation is that it’s easy to ignore for a period of time but once it gets out of control, it takes a painful, nationwide adjustment to check. A year from now will tell us a lot. Let’s hope that whoever is President is not faced with a rapidly increasing inflation rate because the recently implemented stimulus package and slack monetary policy kicked into an economy that really didn’t need it. Inflation in 2008 or 2009 sets the table for a deep recession in 2010.
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