Why central banks are desperate for inflation

One of the most asked questions I get is “How come inflation is not increasing when Central Governments are printing so much money?”

It’s a very good question. In the last seven years the Federal Reserve (the Central Bank of America) has printed four trillion dollars on it’s own. Can you imagine? these are unbelievable numbers. How can you print so much money and still not get inflation, or as many predicted, hyper-inflation?

The answer is that printing money alone is not enough.

You have to lend that money out and get it into circulation for it to have any effect. The reality is that not only do banks not want to lend money right now, consumers don’t want to borrow it either. The private sector is currently trying to pay off it’s loans – even though the public sector has gone the opposite way. I think it’s different when you know someone else will have to pay the money back and not you.

Inflation only happens when more money gets into the system.

So in order to get inflation we need to see the newly printed money actually getting into circulation – and that hasn’t happened yet.

What we have seen instead is very strong deflationary forces at work.

Globalisation means we can source products from cheaper countries around the world. Then there’s the general decline in populations resulting in less demand for both products and services. As the baby boomers start to retire they tend to buy less shiny things. They scale back, they save instead of spending – and they down-size because they no longer need that massive house.

This is not what central banks, or indeed governments want. Despite what they would have you believe, the truth is all governments desperately need inflation for two very important reasons.

First of all inflation reduces the size of ever growing government debt. In fact it is one of the few ways they can actually reduce their debts it since there is absolutely no chance of it ever being paid off. Secondly, rising salaries means rising taxes – another way governments can finance their stupid spending plans.

So, deflation is the last thing any government wants because it INCREASES the value of their debts and REDUCES tax income.

Why government attempts to increase inflation have failed.

Despite throwing every trick in the book at the problem, central banks and governments around the world, have been unable to get inflation on the rise. They have lowered interest rates to the point where they cannot go any lower. They have printed money through QE to the point of exhaustion. They have entertained currency wars at every possible opportunity and continue to do so – and still inflation will not go up.

That’s one of the main reasons why, despite all the talk, interest rates have not been raised this year. The economy cannot afford it and any increase in rates could see a very delicately balanced global economy slip into deflation in a very short period of time.

We have reached the point where they central banks are running out of tricks now – soon the markets will call the tune and central banks will be seen for the parasites they really are.

You can only manipulate a market for so long – we may be very close to the that point even as a write.



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