Although reluctantly, current central bank governors and respected economists have ramped up their warnings that inflation is here to stay. However, while it took officials a considerable period of time to admit the inflationary threat, despite the signs and warnings, they are failing to name its root causes. Inevitably, and anew, a wrong diagnosis will lead to repeated erroneous remedies, which will continue the self-destructive, complacent vicious cycle our Western economies have entered.
The consensus among officials seems to be that this unexpected inflation is solely due to economies being forced to shut down and then reopen, causing disruptions in the supply chains in the process. These disruptions may push the prices of certain products upward. Yet we are seeing an increase in the overall level of prices, in all economies, which should not have happened if there is monetary stability. So, while broken chains may explain in part the price hikes, we must look elsewhere for the true reasons of overall inflation, namely damaging monetary policies and damaging fiscal signals and programs.
Why Price Inflation Didn’t Arrive until Now
Politicians and central bank officials for the better part of the last two decades have agreed that the only way to confront a financial or economic crisis is through interest rate cuts, massive borrowing, and spending, even though there is ample proof that debt accumulation and huge government spending have little effect on economic recovery and gross domestic product (GDP) growth.
The problems arise when, after the crisis has passed, such ineffective programs do not stop. Debt goes up considerably during an emergency, but no effort is made to lower it afterward. Thus, rates were lowered after the subprime mortgage crisis and then the debt crisis in Europe, and they currently remain either at very low positive levels in the US or in negative territory in the eurozone.
After a decade of uninterrupted money printing and deficit spending, the eurozone economies were merely surviving on borrowed time. On the other side of the Atlantic, the same policies were being implemented until 2016. Afterward, deregulation gave some needed breathing room to the American private sector and individuals.
It is true that the Federal Reserve continued its quantitative easing program even during the Trump administration. However, this did not lead directly to price inflation due to the dollar’s status as the reserve currency. That is, the demand for dollars remains quite high even when monetary inflation exists. In fact, until 2020, demand for dollars was higher than the supply of dollars. At the end of 2019, there was a $17 trillion shortage for the dollar.
As Production Declined, Inflation Gained Steam
Nevertheless, during the pandemic, governments shut down their respective economies, sharply reducing activity on the supply side. As a result, production fell considerably in almost all Western countries, including the US. Yet, the Fed, similarly to its counterparts, printed money uninterruptedly to finance the government’s massive spending and to keep rates low. The money supply growth reached an all-time high of 27.1 percent in February 2021, compared to an average of around 6 percent in the previous years. For comparison, the demand for dollars has been growing at about 8 percent on average.
So, for the better part of last year, money was created out of thin air, unbacked by actual physical goods, as production was falling. Naturally, by having an enormous quantity of money circulating in the economy, going to each household in the form of helicopter money, the dollar’s value would be substantially lowered, giving rise to inflation.
Just as the economy was showing signs of improvement, President Joe Biden and the Democrat-run Congress approved trillions of dollars more in spending, much of which was channeled toward zombie companies or unproductive programs. This can be paid either with higher taxes for all individuals or considerable debt increases, and certainly with higher inflation, as the Fed is continuing its money printing to finance government deficits.
Currently, after more than $6 trillion dollars and counting spent, a budget deficit of 12.4 percent of GDP according to the Congressional Budget Office, and $80 million monthly asset purchases by the Fed, the result is a stagnant participation rate of 61.6 percent in the workforce, disappointing monthly job gains, annualized third-quarter GDP growth of 2.0 percent, and just 1.6 percent consumption growth, an average GDP forecast of 1.7 percent for the next decade by the Congressional Budget Office, an expected average unemployment rate of 4.8 percent, and high inflation—currently at a thirty-nine-year high of 6.8 percent.
The situation in the eurozone is even worse, since there have never been any true supply-side measures to boost production, enhance hiring and push up wages, as occurred in the US after 2017. Instead, there was deeper government centralization of the economies, reckless spending, and deficit financing through money printing.
Presently, the base euro area interest rate is zero, while deposit rates are in negative territory—unthinkable a decade ago. The European Central Bank shows no sign of interrupting the bond purchasing, and its governor persists in her refusal to acknowledge dangerous inflationary signs. To make matters worse, nobody even admits that the process of economic zombification in the eurozone is well underway. Centralization of the economy has never worked in human history and is failing once again. Unfortunately for the West, the United States is now surely on the same path as the euro area countries, yet maybe just in time to correct course.
Furthermore, financial repression (by keeping yields artificially low) and central bank interference in markets are unnatural and causing massive deformities in financial and other markets. For example, yields in a stable, healthier country such as Germany are not much different than those in countries with massive debt levels and weaker economic parameters. Central banks have become active market participants, straying far away from their original purposes.
That is why a free market—in essence a most democratic institution—driven by the actions of a considerable number of individuals and reflecting the needs and wants of society is necessary. Only when market participants are left to act and compete freely, are they able to allocate capital in a way that reflects societal requirements and need for innovation. The government, as every monopoly in existence, can never be a substitute for that, leading to unproductive capital allocation and debt accumulation.
A rising inflation environment would require rates to increase and this pace of money printing to stop. Will politicians allow rate hikes, considering their plans for more spending and higher debt? What would the fiscal implications of such a move be? Unavoidably, tapering would reveal structural imbalances that have been hidden in most of the Western economies. That is why, perhaps, central bank officials have been reluctant to stop their quantitative easing programs. Such an action would certainly need to be followed by huge spending cuts, deregulation, and tax reductions to boost productivity—moves that require a political will not present in any Western government.
A desperate need for deep structural changes in Western economies toward higher economic liberty, free and fair markets, more limited government, and fiscal responsibility is evident. However, in the end, all Western governments will be faced with the consequences of their misguided policies and the imbalances they have created.
There needs to be a serious discussion in the economic and financial community, independent of political interference and government lobbying, if we truly want to save Western economies and restore sanity in policy making.
About Nikola Kedhi:
Nikola Kedhi is a Senior Financial Advisor at Deloitte and contributor to various media outlets in the US and Europe, including Fox News, The American Conservative, The European Conservative, Il Giornale, The Federalist, and many others. The article reflects solely the views of the author.
One Sick Day Proves We Need More Voices in Truthful Media
On October 19, I was sick. It crossed my mind that I had finally gotten the ‘rona, but my wife’s cream of chicken soup and a few extra hours of sleep into mid-afternoon had be back up and running after a sleepless night before.
When I finally stumbled over to my computer in the evening, I was met with a deluge of concern from readers. They asked what had happened as only one article had been posted that day. Generally, we post between 10-20 daily between all of the sites, not included curated and aggregated content. Seeing that we’d only posted my super-early morning article before taking the rest of the day off had readers assuming the worst.
We have a wonderful and talented group of writers who volunteer their time for the sites and their readers. Sharing their amazing perspectives has always been a blessing to us because we cannot afford to hire anyone at this time. But having great writers is meaningless if we don’t have great editors, or at least one additional. My wife helps me read and edit stories from time to time, but I’m a one-man show when it comes to getting the stories posted.
Whenever I highlight our desperate need for donations, I note that we do not receive money from Google ads even though most in conservative media are beholden. I often ambiguously note that the money donated will help us grow. Today, I’m highlighting a specific need. We must get an editor to help take some of the load and to expand on our mission of spreading the truth to the world. One sick day proved that.
The great news is that there is no shortage of people who CAN help. I am emailed variations of resumes every week by people who are much smarter than I am. As much as I’d love to hire some of them, we simply cannot. That takes money and as blessed as we’ve been to receive donations and collect ad money (though not from Google or Facebook), we have still fallen short.
Those who have the means, PLEASE consider donating. We have the standard Giving Fuel option and people can donate through PayPal. We are also diving into what we believe is extremely disruptive technology at LetsGo.finance, the world’s first major donation portal for crypto. I’ll be talking a lot more about them in the near future. Those who prefer Bitcoin can send to my address here: 3A1ELVhGgrwrypwTJhPwnaTVGmuqyQrMB8
We can get the voices out there and we’re willing to shine a spotlight on new talent. We just need the resources to make it happen. If you can help, we would be extremely grateful.
Thank you and God bless!
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