Eroding wealth is affecting many people in a variety of ways, including rising inflation on goods and services, plummeting equity markets, and falling housing prices, to name a few.
Governments and central banks, however, deny responsibility for the economic climate they have created, blaming Putin for higher food and energy prices, speculators for eroding equity and housing markets, and China for supply chain issues and lower economic activity as a result of the ongoing zero covid policy lockdowns.
Inflation has been on the rise for more than a decade.
In less than two years, governments provided more than $15 trillion in additional assistance through increased spending and lower taxes. Furthermore, central banks printed money on a massive scale in order to absorb all of the additional debt issued by governments.
Over the last decade, central banks have conditioned everyone to believe that they can save and solve problems by promising to do “whatever it takes.”
Central banks have now pledged to do “whatever it takes” to control inflation. Chair Powell leads the charge away from old ‘transitory inflation’ and toward new ‘yes we were wrong last year, but not wrong again this year’.
Central banks have good reason to keep riding this bandwagon in circles and making little progress.
John Maynard Keynes said:
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Remember that governments have trillions of dollars in debt to deal with, and the quickest way to pay it off is to inflate their way out of it.
The other options are to raise taxes or severely limit spending, neither of which many governments have the political will for, and if they do, they are voted out with promises from the new government to reverse the measures put in place.
The decade-long excess has reached a breaking point!
The Bank of International Settlements (BIS) issued its annual economic report this week, warning that if inflation becomes entrenched in the global economy, it could become the new normal and be difficult to reverse. In other words, higher prices raise prices.
The BIS believes that central banks, including the Fed, are not doing enough to control inflation.
The Fed has raised the fed funds rate three times this year, for a total of 1.5 percent, but the Fed remains “well behind the inflation curve.” The fed funds rate is currently at 1.50 percent-1.75 percent, while the latest U.S. CPI reading for May showed an 8.6 percent year-over-year increase.
Inflation is Hitting its Tipping Point Warns BIS
From the BIS Report:
In addition to cyclical and structural factors, the level of inflation itself can influence wage- and price-setting. Hence the likelihood and intensity of wage-price spirals. In general, a high-inflation regime, if it persists, induces behavioural changes which raise the probability that it will become entrenched, not least by amplifying the impact of relative price increases.
The report explains: The level of inflation is bound to influence the importance of inflation expectations.
Once the general price level becomes a focus of attention, workers and firms will initially try to make up for the erosion of purchasing power or profit margins that they have already incurred.
This, in and of itself, could trigger wage-price spirals if background conditions are sufficiently favourable. And, once inflation becomes sufficiently high and is expected to persist, they will also try to anticipate future changes in the general price level, as these will erode purchasing power and profit margins before contracts can be renegotiated.
The report goes on to warn that once embedded inflation is very difficult and costly to bring under control and it advises central banks to avoid transitions from low- to high-inflation regimes in the first place – to nip inflation in the bud.
Are we past that point?
The BIS answer: We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift.