Central bankers already stated their willingness to rapidly ramp up interest rates at the first sign of inflation. In truth, we are already seeing the first signs of inflation.
The huge monetary expansion that is taking place on both sides of the Atlantic today is de facto inflation. Of course, in order to avoid an inflationary Holocaust, the central banks must tread a very thin line between stimulating the economy and triggering inflation.
Considering that food prices continue to rise at almost 10% per annum, there can be no doubt that inflation is already in the pipeline. However, the gerrymandered figures of governments and central banks state that we are actually in a period of deflation.
When we consider asset prices, this is true. In order to move out of the current economic situation, there are two very difficult paths in front of us. The first path is one where we take the necessary corrective pain which we have been trying to avoid and rebuild the economy from the bottom up.
This involves hiking interest rates up to a level which replenishes the nation’s savings base. Replenishing the savings base would have several key impacts. The first is, it would crash the property market further and faster so that the process of rebuilding could begin faster. The second is, it would allow banks to lend money again without the need for recourse to ridiculous fractional reserve lending multiples.
It would repair their balance sheets very quickly and enable the normal flow of credit to the economy to resume. The third is that would enable entrepreneurs to have access to capital to rebuild the manufacturing infrastructure of the country.
The fourth is that would provide an income to people who have savings so that retirement could be a worry free time. If interest rates do rise substantially as they should, it would mean that the government would be less likely to take on debt to hand to bankers.
If bankers saw this, they would most likely be very cautious in the future about their propensity to gamble with our future tax revenues.
In addition, high interest rates will attract inward investment and would stabilise the currency as well is choking off inflation further down the road.
The other option is to leave interest rates low and descend into a hyper inflationary nightmare. Both are painful, but only one is fatal. The problem we have is that politicians will very likely try to postpone the pain for as long as they possibly can. This will only make it worse in the long run.
