The constant financing of deficits in countries that perpetuate structural imbalances has not only not helped to strengthen growth, since the eurozone and the United States already suffered downgrades of estimates before the COVID-19 crisis, but is also driving inflation higher.
Monetary policy has been ultra-expansive for more than 10 years, in crisis, recovery, growth, and stabilization. In fact, the central bank becomes hostage to states that don’t reduce their structural imbalances but perpetuate them because the cost of debt is low and the central bank “supports” them.
It’s no coincidence that the reformist momentum has stopped short since 2009. It coincides exactly with the period of never-ending balance sheet expansion.
Low rates and high liquidity have never been an incentive to reduce imbalances, but rather a clear incentive to increase debt.
Once in place, the so-called expansionary monetary policy can’t be stopped. Does any central banker believe that states with a structural deficit greater than 4 percent per year are going to eliminate it while there are negative rates and liquidity injections?
The worst excuse of all is that “there’s no inflation.”
It’s not by chance that the eurozone saw massive protests against the increase in the cost of living while we read that “there’s no inflation.” But it’s also, at the very least, imprudent to say that there’s no inflation without considering the increase in non-replicable goods and services (rent, fresh food, health care, education, etc.) and financial assets that have rocketed with this policy.
A recent study by Alberto Cavallo of the Harvard Business School and Bloomberg Economics warns of precisely this differential between real inflation suffered by consumers, especially the poorest, and the official CPI.
In fact, if we analyze the cost of living with the goods and services that we really use frequently, we realize that in an unprecedented crisis such as that of 2020, prices for the poorest layers rise almost triple what the CPI shows, and that, added to the distorting factor of the enormous inflation in financial assets, this generates enormous social differentials. This wealth destruction is even more evident in the first month of 2021.
Now, remember that the German wholesale price index was kept low by a fall of more than 3 percent in the energy component. However, no German citizen has seen a fall of 3 percent after taxes and surcharges in their energy bills.
Many analysts state that this rise in inflation will be temporary due to the base effect of the re-opening of most developed economies and the fast recovery in commodity prices. This is absolutely correct, and we will likely see a slowdown in official inflation in the second half of 2021. However, this isn’t likely to be the case with the goods and services we really buy, and the rise in non-replicable and essential goods and services will remain significantly above real wages and the official CPI.
This pricing pressure creates even more inequality, as it affects mostly the poor, and becomes a real burden for most middle-class families, which have seen wages fall but the prices of goods and services that they can’t eliminate, or substitute, rise even in crisis times. Furthermore, the poor and lower-middle-class don’t benefit from the asset price inflation created by monetary policy.
Former Federal Reserve Chair Ben Bernanke used to say that central banks are not in charge of fiscal policy and that this is a matter of fiscal policy. Well, it’s not. Massive money supply growth and its negative consequences aren’t solved by raising taxes and increasing subsidies. This just perpetuates the problem and creates a zombie subclass that can never recover from the boom-and-bust periods.
What’s the biggest risk? It’s that even if inflation overshoots, central banks can’t stop the easing machine because insolvent governments would go into a massive debt crisis with just a few percentage points yield increase. Faced with the choice of helping consumers or governments, most central banks will choose the latter.
Central banks can’t ignore the effect of fiat currency debasement in this cost-of-living problem because it will get worse and can lead to significant social unrest and discontent. It can all be mitigated with a simple Taylor-rule-based policy that eliminates discretionary and random policy changes.
If you want to protect your savings, gold and silver are important assets to own, especially physical assets, not just financial instruments. Equities only help while monetary policy continues to create asset inflation, but that can stop abruptly when money supply growth coincides with nominal GDP growth, as the multiple expansion effect dies. Sovereign bonds aren’t a solution as both the price and the yield make them the most expensive asset.
As such, gold, silver, cryptocurrencies, and inflation-linked bonds may be ways to protect wealth against fiat currency debasement.