So. Where’s the inflation then…? – a guest blog by Andy Crow

Much of my recent interest in economics and finance stems from an enquiry into the, to me, previously completely mysterious world of financial markets. So I have sources from that world which offer a completely different perspective of the world from that which I grew up in.

Two items hit my inbox recently which are curiously related, this first is from one Nomi Prins, who probably knows where at least some of the bodies are buried, having worked for the Goldmans and the Bear Stearns of this world before becoming a freelance author and journalist. What follows is extracted from what is largely a plug for her latest book, ‘Collusion: How Central Bankers Rigged the World’

Since the financial crisis, ..…. the G7 collectively fabricated $21 trillion worth of money. [US contribution $4.5 trillion] They took the liberty then to buy government bonds, corporate bonds, mortgage bonds …[etc]

These “conjured money” efforts did nothing to alter the fundamental values of companies. Companies could borrow money and buy their own stocks on the cheap, increasing the size of corporate debt and the level of the stock market to record highs.
Because money was so cheap and interest rates so low, no other investment opportunities could offer the same high returns, so speculators piled into the stock markets, further elevating their levels.

That tallies fairly closely with my view of what has happened since 2008.

The idea is that if the cost of money is cheap enough, private banks will lend to the general population and businesses. The ultimate goal is that the money can be used to expand enterprise, hire people and develop a stronger economy.

And that tallies with my recollection of what Gordon Brown and or Alastair Darling said when they were explaining why a banking bailout and QE was the easiest way to sort out the mess. Adding austerity to the mix, as far as I remember, was George Osborne’s cunning plan.

 Since 2010 I have noticed a lot of commentators have been puzzling over the non-appearance of any inflation. This appears to have mystified central bankers and academic pundits and apparently still does, judging by the other piece that landed the other day. Mind you they persist in saying that unemployment is at historic lows, so one has to wonder where they get their information.

This second reference comes courtesy of ‘Coppola Comment’ from California and is actually reposted from 2014, on the basis that it is still highly relevant. It refers to the study of two wizards, Yi Wen, Assistant Vice President and Economist, and Maria A. Arias, Research Associate of the Federal bank of St Louis. You’d think they’d have sussed out what was going on but apparently they hadn’t.

They have managed to come up with some cockamanie theory that it’s all down to lack of velocity and Americans are keeping all their money in the bank. Is it likely that if John and Jane Doe had $4.5 Trillion in their bank accounts they wouldn’t be buying anything? I make that approximately $22,500 each.

So are central bankers stupid, which might explain the state of the global economy.

Or is it more likely, as Nomi Prins implies in her title, that they are rigging the world?

 I couldn’t possibly comment.

Comments

  1. Peter Dawe -

    There IS Inflation, it is in capital assets, rather than revenue spend as measured by RPI etc.
    This works really well for asset owners, especially those who leverage.
    It also makes assets ever more unattainable to the masses, who’s revenues do not increase and have no access to debt-for-asset purchase.

    Genius way of screwing the masses! And they have been getting away with it for nearly 2 decades so far

    1. Peter May -

      Agreed, but that means that Bank bailouts haven’t worked as intended and that the idea that the BoE adjusts the interest rate to contain inflation is for the birds…

      1. Peter Dawe -

        Hmm, I’m afraid the Bank bailouts worked exactly as intended. I now assume government are totally owned and policies are all about enrichment of the few. While publicly they wring their hands about the poor.

        1. Peter May -

          I’m perhaps stupid enough to think that this wasn’t what was originally intended by Brown et al at the time. After all I know the Tories have subsequently put it back up, but Brown/Darling actually put VAT down at the same time.

    2. Andy Crow -

      Absolutely agree, Peter Dawe. Of course there has been inflation. And it’s all in asset prices. For some reason central bankers, and politicians choose not to notice this.

      I share Peter May’s query as to the extent this was inevitable and intended. Brown/Darling may well have had different ideas about the longer term. It was certainly the stated intention that bailed out banks would lend, but there was no compulsion to do so.

      Osborne’s austerity campaign effectively choked off the demand for loans to the productive economy anyway.

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