Macleod: Inflation Is Turning Hyper...
Sept 15, 2022 22:13:05 GMT -5
Post by maybetoday on Sept 15, 2022 22:13:05 GMT -5
Macleod: Inflation Is Turning Hyper...
THURSDAY, SEP 15, 2022 - 10:20 PM
Authored by Alasdair Macleod via GoldMoney.com,
Money supply took off during covid lockdowns. It is now about to take off again to pay everyone’s energy bills. But that is not all.
Demands for currency and credit to be conjured out of thin air to pay for everything will be coming thick and fast. Expectations that energy prices, including European electricity, have peaked are naïve. Putin has yet to put the winter and spring screws on Europe and the world fully. It will be surprising if global oil and natural gas prices in Europe are not significantly higher on a twelve-month view. And Europe has messed up its electricity supplies — that is where the energy costs will rise most.
Bankers are trying to reduce their loan exposure to rising interest rates, undermining GDP. Besides paying for everyone’s energy bills, rescuing troubled banks, collapsing tax revenues, and difficulties in selling government debt on rising yields, governments are expected to apply economic stimulus to support both their economies and financial markets.
Furthermore, this article points to evidence as to why the expansion of central bank credit has a far greater impact on prices than contracting bank credit. The replacement of commercial bank credit by central bank credit will have a far greater inflationary impact than the deflation from bank credit alone.
Attempts to rescue the American, European, and Japanese economies by replacing commercial bank credit with central bank credit will probably be the coup de grace for fiat.
We can begin to anticipate the path to the destruction of purchasing power for all fiat currencies, not just those of Zimbabwe, Turkey, and Venezuela et al. A global hyperinflation is proving impossible to avoid.
First it was covid, now it is energy…
For the magic money tree, its exfoliation is just one thing after another…
Having recognised the impracticality of putting price controls on Russian gas and oil, the EU is turning to protecting all households and businesses from the energy crisis. Even Switzerland, and now the UK are bowing to the inevitable consequences of combining inflationary monetary policies of recent years, environmental wokism, and frankly irresponsible energy policies with the decision to sanction the world’s largest energy exporter.
There can be little doubt that a common approach to resolving energy problems has been decided upon following informal discussions at a supranational level. After all, forums such as the G7 and G20 are all about agreeing to act together, a united front to prevent markets taking control of events out of government hands. Lines of communication continue between formal meetings. That way, establishment statists believe there is less chance of a currency crisis created by one government pursuing a rogue course.
The consequence, of course, is that even with successful management, misguided policies get implemented. A group-thinking form of myopia takes over. And while the immediate problem is addressed, the consequences are rarely foreseen. These subsequent effects are almost certainly going to undermine statist attempts to alleviate the hardship their earlier policies have inflicted on their electors.
In Britain’s case, it is proposed that electricity and presumably gas bills will be fully funded above £2,500 per household, with support arrangements to be put in place for businesses. But much of France’s nuclear power is shut down — 32 of Électricité de France’s 56 nuclear reactors are out of action, with four showing stress corrosion and small cracks in the cement works and a further 12 reactors suspected of being similarly affected. The other sixteen are shut for routine maintenance. It seems that France expects to import electricity through October to February from European neighbours, including the UK, while the UK expects to import French electricity.
How support for businesses will be implemented is unclear; it is an extremely complex issue. But there is little doubt that without this support, the economy will collapse this winter as businesses shut down, unemployment rockets, and the lowest rungs in society, emotively the elderly and struggling single mothers, find it impossible to keep body and soul together. From the government’s point of view, if nothing is done now revenue will collapse, welfare costs escalate, civil disobedience could worsen, and law and order break down. The same problems would arise in the European Union, with some nations facing a greater propensity to riot.
There is no doubt that in the practical world of modern politics, where everyone’s business is the business of government, there is no alternative to ramping up support for the people and their employers in the times ahead. Either the problem has to be faced now, or the consequences for government finances will have to be faced later.
The problem of financing energy subsidies is not yet a public issue. As experience with covid showed, governments were able to ramp up their funding to cover emergencies without much difficulty. This leads to an assumption that governments can simply issue more debt — perhaps £150 billion in the UK’s case but likely to be more, taking the government debt to GDP ratio to over 110%. The impact on indebted EU member states with already far higher debt to GDP ratios is not good either, but what else is to be done?
Undoubtedly, selling bonds to pay for everyone’s excess energy bills will be problematic. Government funding through covid and its aftermath was against a background of declining interest rates, when banks, insurance companies and pension funds were prepared to buy government bonds. We now face the prospect of rising interest rates, with price inflation suggesting that interest rates have much, much further to rise. Appetite for fixed interest bonds is bound to be substantially diminished. Furthermore, central banks are no longer quantitatively easing, but beginning to tighten.
Therefore, the market certainty that comes with central banks underwriting their government bond prices is no longer there. Investors, mostly in the form of pension funds and insurance companies, are bound to take a more cautious view and have little alternative to ducking auctions of government debt.
Without genuine investment being diverted from the private sector into government bonds, any issue of government debt exceeding redemptions of existing stock becomes inflationary. Central banks are surely aware that to accommodate this new wave of government borrowing, quantitative tightening will have to be abandoned, funding through short-term commercial bank credit will be increasingly relied upon, and bond yields must rise to the point where debt can be got away. As to whether quantitative easing will be reintroduced, that would represent a policy U-turn of great difficulty at a time of rising interest rates and rising consumer prices.
Market participants have not yet taken this problem fully inboard, confirmed by complacency over valuations in financial markets. Despite the wake-up call this week when US consumer prices rose ever so slightly more than expected and the Dow fell 1,276 points, investors still hope that inflation is transitory, and that the threat of a deepening recession is a far greater problem, limiting the rise in bond yields. Current macroeconomic theories only allow for one or the other outcome. A contraction of credit, higher prices, and higher interest rates is deemed contradictory to the solution for a recessionary outlook.
But rising bond yields in any real magnitude simply destroys value and therefore credit. A shortage of credit ensues, and the scramble for more credit to replace it drives interest rates even higher. It always happens at the onset of a financial crisis, as clearly illustrated by the UK’s secondary banking crisis in 1973. The Bank of England’s rates reluctantly began to rise that April from 9.75% against a deteriorating economic background, reflecting a tightening of credit. Banks exposed to commercial property began to collapse after the BoE’s rate was raised to 12% in October.
The root of the confusion is essentially ignorance of the relation between the quantity of credit in circulation and the consequences of its contraction. It is this relationship which rules prices, not the supply and demand curves favoured by the neo-Keynesian consensus.
Economists and the investing establishment prefer to view the expansion of currency and credit in connection with the covid crisis as a one-off event, with economies and government finances reverting to more sustainable paths in due course. Examples of this thinking are shown in both the Congressional Budget Office’s ten-year forecasts, and in those of the UK’s Office for Budget Responsibility. Every time their forecasts are proved incorrect, they simply extend the timeline back to the official inflation target.
Putting aside the legacy of damages done to businesses and personal finances, it can be claimed that covid is behind us. But to believe that government finances are free to recover over time is ill-founded.
Continued at link
THURSDAY, SEP 15, 2022 - 10:20 PM
Authored by Alasdair Macleod via GoldMoney.com,
Money supply took off during covid lockdowns. It is now about to take off again to pay everyone’s energy bills. But that is not all.
Demands for currency and credit to be conjured out of thin air to pay for everything will be coming thick and fast. Expectations that energy prices, including European electricity, have peaked are naïve. Putin has yet to put the winter and spring screws on Europe and the world fully. It will be surprising if global oil and natural gas prices in Europe are not significantly higher on a twelve-month view. And Europe has messed up its electricity supplies — that is where the energy costs will rise most.
Bankers are trying to reduce their loan exposure to rising interest rates, undermining GDP. Besides paying for everyone’s energy bills, rescuing troubled banks, collapsing tax revenues, and difficulties in selling government debt on rising yields, governments are expected to apply economic stimulus to support both their economies and financial markets.
Furthermore, this article points to evidence as to why the expansion of central bank credit has a far greater impact on prices than contracting bank credit. The replacement of commercial bank credit by central bank credit will have a far greater inflationary impact than the deflation from bank credit alone.
Attempts to rescue the American, European, and Japanese economies by replacing commercial bank credit with central bank credit will probably be the coup de grace for fiat.
We can begin to anticipate the path to the destruction of purchasing power for all fiat currencies, not just those of Zimbabwe, Turkey, and Venezuela et al. A global hyperinflation is proving impossible to avoid.
First it was covid, now it is energy…
For the magic money tree, its exfoliation is just one thing after another…
Having recognised the impracticality of putting price controls on Russian gas and oil, the EU is turning to protecting all households and businesses from the energy crisis. Even Switzerland, and now the UK are bowing to the inevitable consequences of combining inflationary monetary policies of recent years, environmental wokism, and frankly irresponsible energy policies with the decision to sanction the world’s largest energy exporter.
There can be little doubt that a common approach to resolving energy problems has been decided upon following informal discussions at a supranational level. After all, forums such as the G7 and G20 are all about agreeing to act together, a united front to prevent markets taking control of events out of government hands. Lines of communication continue between formal meetings. That way, establishment statists believe there is less chance of a currency crisis created by one government pursuing a rogue course.
The consequence, of course, is that even with successful management, misguided policies get implemented. A group-thinking form of myopia takes over. And while the immediate problem is addressed, the consequences are rarely foreseen. These subsequent effects are almost certainly going to undermine statist attempts to alleviate the hardship their earlier policies have inflicted on their electors.
In Britain’s case, it is proposed that electricity and presumably gas bills will be fully funded above £2,500 per household, with support arrangements to be put in place for businesses. But much of France’s nuclear power is shut down — 32 of Électricité de France’s 56 nuclear reactors are out of action, with four showing stress corrosion and small cracks in the cement works and a further 12 reactors suspected of being similarly affected. The other sixteen are shut for routine maintenance. It seems that France expects to import electricity through October to February from European neighbours, including the UK, while the UK expects to import French electricity.
How support for businesses will be implemented is unclear; it is an extremely complex issue. But there is little doubt that without this support, the economy will collapse this winter as businesses shut down, unemployment rockets, and the lowest rungs in society, emotively the elderly and struggling single mothers, find it impossible to keep body and soul together. From the government’s point of view, if nothing is done now revenue will collapse, welfare costs escalate, civil disobedience could worsen, and law and order break down. The same problems would arise in the European Union, with some nations facing a greater propensity to riot.
There is no doubt that in the practical world of modern politics, where everyone’s business is the business of government, there is no alternative to ramping up support for the people and their employers in the times ahead. Either the problem has to be faced now, or the consequences for government finances will have to be faced later.
The problem of financing energy subsidies is not yet a public issue. As experience with covid showed, governments were able to ramp up their funding to cover emergencies without much difficulty. This leads to an assumption that governments can simply issue more debt — perhaps £150 billion in the UK’s case but likely to be more, taking the government debt to GDP ratio to over 110%. The impact on indebted EU member states with already far higher debt to GDP ratios is not good either, but what else is to be done?
Undoubtedly, selling bonds to pay for everyone’s excess energy bills will be problematic. Government funding through covid and its aftermath was against a background of declining interest rates, when banks, insurance companies and pension funds were prepared to buy government bonds. We now face the prospect of rising interest rates, with price inflation suggesting that interest rates have much, much further to rise. Appetite for fixed interest bonds is bound to be substantially diminished. Furthermore, central banks are no longer quantitatively easing, but beginning to tighten.
Therefore, the market certainty that comes with central banks underwriting their government bond prices is no longer there. Investors, mostly in the form of pension funds and insurance companies, are bound to take a more cautious view and have little alternative to ducking auctions of government debt.
Without genuine investment being diverted from the private sector into government bonds, any issue of government debt exceeding redemptions of existing stock becomes inflationary. Central banks are surely aware that to accommodate this new wave of government borrowing, quantitative tightening will have to be abandoned, funding through short-term commercial bank credit will be increasingly relied upon, and bond yields must rise to the point where debt can be got away. As to whether quantitative easing will be reintroduced, that would represent a policy U-turn of great difficulty at a time of rising interest rates and rising consumer prices.
Market participants have not yet taken this problem fully inboard, confirmed by complacency over valuations in financial markets. Despite the wake-up call this week when US consumer prices rose ever so slightly more than expected and the Dow fell 1,276 points, investors still hope that inflation is transitory, and that the threat of a deepening recession is a far greater problem, limiting the rise in bond yields. Current macroeconomic theories only allow for one or the other outcome. A contraction of credit, higher prices, and higher interest rates is deemed contradictory to the solution for a recessionary outlook.
But rising bond yields in any real magnitude simply destroys value and therefore credit. A shortage of credit ensues, and the scramble for more credit to replace it drives interest rates even higher. It always happens at the onset of a financial crisis, as clearly illustrated by the UK’s secondary banking crisis in 1973. The Bank of England’s rates reluctantly began to rise that April from 9.75% against a deteriorating economic background, reflecting a tightening of credit. Banks exposed to commercial property began to collapse after the BoE’s rate was raised to 12% in October.
The root of the confusion is essentially ignorance of the relation between the quantity of credit in circulation and the consequences of its contraction. It is this relationship which rules prices, not the supply and demand curves favoured by the neo-Keynesian consensus.
Economists and the investing establishment prefer to view the expansion of currency and credit in connection with the covid crisis as a one-off event, with economies and government finances reverting to more sustainable paths in due course. Examples of this thinking are shown in both the Congressional Budget Office’s ten-year forecasts, and in those of the UK’s Office for Budget Responsibility. Every time their forecasts are proved incorrect, they simply extend the timeline back to the official inflation target.
Putting aside the legacy of damages done to businesses and personal finances, it can be claimed that covid is behind us. But to believe that government finances are free to recover over time is ill-founded.
Continued at link
