By Nikola Kedhi *
Although reluctantly, current central bank governors and respected economists have stepped up their warnings that inflation is here to stay. However, while it has taken a considerable time for officials to admit the inflationary threat, despite the signs and warnings, they fail to name the root causes. Inevitably, and again, misdiagnosis will lead to repeated erroneous remedies, which will continue the vicious, self-destructive and complacent cycle our Western economies have entered.
The consensus among officials appears to be that this unexpected inflation is only due to economies being forced to close and then reopen, causing disruption in supply chains. These disturbances can push the prices of certain products upwards. Yet we are seeing an increase in the overall price level, in all economies, which should not have happened if there was monetary stability. So, while broken chains may partly explain price increases, we must look elsewhere for the real reasons for headline inflation – damaging monetary policies and damaging fiscal signals and programs.
Why price inflation has not happened until now
For most of the past two decades, politicians and central bank officials have agreed that the only way to deal with a financial or economic crisis is to cut interest rates, borrow heavily, and spend, even While there is ample evidence that the accumulation of debt and huge public spending has little effect on economic recovery and gross domestic product (GDP) growth.
Problems arise when once the crisis is over, these ineffective programs do not stop. Debt increases dramatically in an emergency, but no effort is made to reduce it afterwards. Thus, the rates were lowered after the subprime crisis then the debt crisis in Europe, and they remain today either at very low positive levels in the United States, or in negative territory in the euro zone.
After a decade of uninterrupted money printing and deficit spending, eurozone economies only survived with borrowed time. On the other side of the Atlantic, the same policies were implemented until 2016. Subsequently, deregulation gave the necessary impetus to the American private sector and individuals.
It is true that the Federal Reserve continued its quantitative easing program even under the Trump administration. However, this did not directly lead to price inflation due to the dollar’s status as a reserve currency. That is, the demand for dollars remains quite high even when monetary inflation exists. In fact, until 2020 the demand for dollars was greater than the supply for dollars. At the end of 2019, there was a $ 17 trillion dollar shortage.
As output fell, inflation gained momentum
Nonetheless, during the pandemic, governments shut down their respective economies, sharply reducing activity on the supply side. As a result, production has fallen dramatically in almost all Western countries, including the United States. Yet the Fed, like its counterparts, has been printing money continuously to fund massive government spending and keep rates low. Money supply growth reached a record high of 27.1% in February 2021, compared to an average of around 6% in previous years. By comparison, the demand for dollars has increased by about 8% on average.
So, for most of the past year, money has been created out of thin air, unsupported by real physical goods, as production dwindles. Naturally, by circulating a huge amount of money in the economy, going to every household in the form of helicopter money, the value of the dollar would be lowered considerably, causing inflation.
As the economy showed signs of improving, President Joe Biden and the Democratic-led Congress approved billions of dollars in additional spending, much of which was spent on zombie businesses or unproductive programs. This can be paid for either by higher taxes for all individuals or by massive increases in debt, and certainly higher inflation, as the Fed continues to print money to finance government deficits.
Currently, after more than $ 6 trillion spent, a budget deficit of 12.4 percent of GDP according to the Congressional Budget Office, and $ 80 million in monthly asset purchases by the Fed, the result is a turnout. stagnating at 61.6% in the working population. , disappointing monthly job gains, annualized third-quarter GDP growth of 2.0% and consumption growth of just 1.6%, an average GDP forecast of 1.7% for the next decade per the Congressional Budget Office, an expected average unemployment rate of 4.8 percent, and high inflation â currently at a thirty-nine-year high of 6.8 percent.
The situation in the eurozone is even worse, as there have never been any real measures on the supply side to stimulate production, increase hiring and raise wages, as has happened in the United States. post 2017. Instead, there has been greater government centralization of savings, reckless spending, and deficit financing through money printing.
Right now, the euro zone’s base interest rate is zero, while deposit rates are in negative territory, which was unthinkable ten years ago. The European Central Bank shows no signs of stopping bond buying and its governor persists in his refusal to recognize dangerous inflationary signs. To make matters worse, no one even admits that the process of economic zombification in the euro zone is well underway. Centralization of the economy has never worked in the history of mankind and is failing once again. Unfortunately for the West, the United States is now surely on the same track as the eurozone countries, but perhaps just in time to raise the bar.
In addition, financial repression (by keeping yields artificially low) and central bank interference in markets are unnatural and cause massive distortions in financial and other markets. For example, returns in a stable, healthier country like Germany are not much different from countries with massive debt levels and weaker economics. Central banks have become active market players, deviating far from their original objectives.
This is why a free market, in essence one of the most democratic institutions, governed by the actions of a considerable number of individuals and reflecting the needs and desires of society is necessary. It is only when market players are free to act and compete that they are able to allocate capital in a way that reflects societal demands and the need for innovation. Government, like any existing monopoly, can never substitute for this, leading to unproductive capital allocation and accumulation of debt.
An environment of rising inflation would require a rate hike and a halt to this rate of money printing. Will politicians allow rate hikes, given their plans for more spending and higher debt? What would be the tax implications of such a decision? Inevitably, the tapering would reveal structural imbalances that have been hidden in most Western economies. Perhaps this is why central bank officials have been reluctant to stop their quantitative easing programs. Such action should certainly be followed by huge spending cuts, deregulation and tax cuts to boost productivity – steps that require a political will that is not present in any Western government.
A desperate need for deep structural changes in Western economies towards greater economic freedom, free and fair markets, more limited government and fiscal responsibility is evident. However, in the end, all Western governments will face the consequences of their misguided policies and the imbalances they have created.
There has to be serious discussion within the business and financial community, independent of political interference and government lobbying, if we are serious about saving Western economies and restoring sanity to policymaking.
* About the Author: Nikola Kedhi is a Senior Financial Advisor at Deloitte and a contributor to various media in the US and Europe including Fox News, The American Conservative, The European curator, Il Giornale, The Federalist, and many more. The article reflects the views of the author only.
Source: This article was published by the MISES Institute