Economy

Central banks’ flood of money after Corona: is big inflation coming now?

To quote the notorious great thinkers Friedrich Engels and Karl Marx: A specter is about in Europe, the specter of inflation …

The corona crisis has devastating consequences for the global economy, which is now evident to everyone. “Bans on contacts” and curfews for a large part of humanity have caused the supply of goods and services to collapse on the supply side – and consumption on the demand side. In Germany and numerous other countries, millions of employees were sent on short-time work or dismissed without further ado.

In the United States alone, the largest economy of all, about one million people have lived in the past four weeks per working day lost their job – a total of 22 million. In spite of financial injections and bailouts by their governments, countless companies will go bankrupt. The debt of states and companies, even before Corona at a historically unique level, is increasing faster than ever.

To counteract and alleviate the worst economic upheavals in the COVID-19 pandemic, the world’s major central banks – particularly America’s Federal Reserve and its European counterpart, the European Central Bank (ECB) – have launched unprecedented first aid measures . They provide liquidity for almost everything and almost everyone. There are good reasons for it. The two most important:

• Only with liquidity can the crisis spread from the real economy to the Financial sector prevent.

• Central banks have after ten years ago Interest rates have given up as a de facto regulatory, simply no other weapon in their arsenal that would work in the short term. They are figuratively speaking what you get in English one-trick pony called, a Hottehü circus horse that can only do a small number, but which is particularly beautiful: print money.

Even in the wake of the Great Financial Crisis (GFK), which began in the US mortgage market in summer 2007, central banks had “printed” money to an extent that the world would have thought impossible until then – and for dubious and banana-republican anyway. “Quantitative easing”, QE for short, was the term used in the jargon of the US monetary authorities.

A central bank no longer prints banknotes, it does it digitally

The term “money printing” does not really apply because a central bank that wants to provide liquidity in the 21st century and expand the money supply no longer prints banknotes. She does it digitally. To put it simply, the central bank buys financial institutions from banks and transfers them fresh, conjured up fiat money from the air. Commercial banks pass on the fresh funds, for example by circulating them through loans. In a monetary system that is not anchored in real assets like gold, central banks can and may.

Actually, one should assume that this method of brisk money multiplication will sooner or later be reflected in the inflation figures, which would cause prices to rise just as quickly. But curiously, this happened in the years after the GFK Not. Although liquidity has spectacularly increased around the world for years, there did not (and does not seem to be) “inflation”. In Germany, for example, the largest EU economy, it was recently 1.4 percent and only about half as high in the entire euro zone. One could think of mini inflation, everything in the green area. Or not?

What is important is the difference between consumer price inflation and asset price inflation

At this point it is crucial to differentiate between Consumer price inflation on the one hand and Asset price inflation on the other. In the case of consumer prices, in other words the “inflation rate” that is usually cited in the news, the price surge was light. (We leave out here that the methodology for determining the consumer price index is controversial, for example with regard to the underlying shopping cart and the so-called hedonic calculation method.)

Asset prices, on the other hand – the prices of property and equipment – saw a different, more dynamic development. At the end of 2019 (i.e. before Corona), the Flossbach from Storch Research Institute in Cologne determined an annualized increase in asset prices for Germany of 7.6 percent. At the time, that was 6.4 percentage points more than consumer prices, a good six times as much. The longer-term view paints a similar, albeit less extreme picture. Since the beginning of 2015, according to the institute, “long-term annual asset price inflation” has been 3.2 percent, consumer price inflation 1.4 percent.

The value of stocks, premium wine and real estate skyrocketed, that’s inflation too

If central banks “print” money on a large scale, there is an inflation effect. However, not necessarily at the bakery, in the supermarket or in the drugstore, but with the assets. In the decade between the GRP and the corona pandemic, the value of stocks, precious metals and real estate of all kinds doubled and tripled. The prices of boring bonds, which were considered to be particularly safe, continued to rise. And even the prices called for unconventional “tangible assets” such as classic cars, premium wine and art went through the roof. Also the is inflation. Assets had landed the liquidity that the Fed, ECB and other central banks had distributed for ten years.

However, the money printing in response to the current global economic crisis leaves the dimensions of monetary policy measures in the wake of the GFK far behind. The Fed’s QE no longer knows any boundaries, is “unlimited”, and the ECB, with a different wording, does the same. We are experiencing an unprecedented tsunami of fiat money that is sloshing through the global economy and, figuratively speaking, will eventually hit land somewhere. The timeline is of particular importance.

The global economy is currently experiencing a combination of a demand shock (nobody can buy big) and a supply shock (apart from basic supplies, hardly any production takes place). So the mixed situation for Consumer prices all in all short term deflationary; Prices fall. In particular, the fall in oil prices and other important commodity prices such as copper and iron ore are driving this trend. In addition, there have been massively slumped transport costs in world trade, such as freight rates in overseas container transport. In turn, the Baltic Dry Index, which tracks the costs of shipping raw materials, has plummeted by more than 80 percent since last autumn.

In the long term consumers around the world, on the other hand, could see significantly higher inflation rates in consumer prices. The supply and supply chains in the western world have been operating in just-in-time mode for years and are accordingly sensitive to irregularities. While the notorious, essentially harmless KNP syndrome (toilet paper noodle panic) has so far mostly caused empty shelves in Europe and North America, gaps could quickly open up in other segments of basic care: shortages.

As soon as the shutdown ends, the world could experience a shock of demand

The Department of Agriculture, for example, found that a dozen eggs in the United States temporarily cost more than $ 3 in April compared to less than a dollar in early March. A multiplication in a month. The is consumer price inflation. As soon as the majority of humanity, who is currently forcibly shutting themselves off at home, goes back on the streets and in shops, the world could experience a shock of demand, a catch-up effect that not only increases the cost of American chicken eggs.

Would that be so bad? In “normal” times, should consumer prices start to climb, central banks would quickly consider rate hikes to dampen economic momentum, consumption and price inflation. Only the global financial system has been shaped by a different, new “normality” for a good decade, which makes such old-fashioned monetary policy measures impossible.

If the ECB raised interest rates, it would be bankrupt for Greece and Italy

For example, what would happen if the ECB wanted to raise interest rates to curb burgeoning consumer price inflation? In an abbreviated wording: Greece and Italy, which so far have been paying mini-interest rates thanks to the ECB despite uncontrolled government debt, would go bankrupt within a very short time. That would end the euro zone, European government bonds, German capital life insurance, insurance companies and banks, the world financial system and Angela Merkel.

It is not critical whether consumer price inflation will soon reach four, six or eight percent. It is crucial that the inflation rate increases, but the interest rate Not. This further widens the gap between consumer price inflation and nominal interest rates, and the real interest rate (i.e. nominal interest rate minus inflation rate) plunges even deeper than now into the negative range. That efficiently destroys the value of money. With a real interest rate of permanently minus four percent, a large part of the purchasing power is wasted after 20 years.

Also Property prices are for world economic crises short term susceptible. They tend to correct for some time and can even crash – for example, the prices for real estate, shares (see the shocking Corona stock market crash), even gold (see middle of March). In the long term the situation is different, as the decade between the GRP and the corona crisis has shown. A tsumani of liquidity causes asset price inflation, that is, sharply rising share and bond prices, increases in the value of real estate of all kinds (in addition to housing, land and arable land) as well as precious metal prices.

Who is one of the winners and losers of inflation

Should this pattern repeat itself in the coming months and years, especially those would become the Lose belong who have put their money (like most Germans) into “nominal” forms of investment. Anyone who keeps their savings for the sake of supposed security on a call money account, fixed deposit, savings book or in cash under their pillows is quickly expropriated by inflation. Bonds would also be massively endangered – and thus all those who use life insurance policies who primarily (must) invest in bonds.

To the Winners Inflation would belong above all to those who have “real” real assets, which do not maintain their purchasing power perfectly, but relative Well. These include physical precious metals (bars, coins), real estate and corporate holdings (stocks, funds, ETFs). The biggest beneficiaries of inflation are, of course, debtors. Because when money is devalued, even outstanding loans take care of themselves – and quickly. With states being the biggest debtors of all, governments will be able to take advantage of this convenient magic effect.

In the 19th century, when Marx and Engels had communist visions, nobody really wanted to believe in the spirits they called. This did not change the fact that the communist-socialist complex of ideas was to become one of the leitmotifs of the 20th century worldwide – a “ghost” that turned out to be a very real one, in whose slipstream war, terror and mass poverty entered. We are all well advised to take the specter of inflation seriously today. It could be more than just a spook.

Michael Braun Alexander is one of the most distinguished financial journalists in Germany. He has been writing about the stock exchange and the economy since 1995. a. as a correspondent in Mumbai and New York and as a columnist for the Bild am Sonntag newspaper, and has published numerous books on investing (when money dies, gold goes, really rich). He bought his first shares over 30 years ago.

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