Thats because covid wasn’t the cause. It actually may have delayed the inflation rises. It’s not a UK problem, the whole world has now realised we are running out of stuff. I’m working with a client in NZ and all building work has stopped because they can’t get the materials.
As regards high inflation I am even more sure it's down to Covid, but this time it's the furlough payments (and other forms of financial support), made even more inflationary because these occurred at the same time as the economy was suppressed.
Sorry guys, but actually, you are both right. I fact you are both dead right!
It's a case of everything happening at once! Imagine the world's real economy in physical goods is a huge complex and intertwining set of streams of traffic. In days gone by, those streams moved slowly and most movements were local. Bricks were fired in large kilns and stored in huge piles on-site and brought to a housing project by horse and cart and later by lorries. Food was seasonal and local and in N.Europe, it was food that could be stored over Winter. Payment was in commodity or representative currency, i.e. money made from or backed by gold and silver.
But then we started borrowing and moving goods further and faster - so we got wealthier in real terms. We had trains and boats, followed by trucks. Then we got really fast with fiat currencies and we borrowed even more - even governments and banks borrowed. We kept the storage of goods and commodities down to a minimum.
Then along came all kinds of innovations like the just-in-time movement of just about every damn thing we used. The Internet meant that we could compare every outlet and supplier and we could offer our goods across Planet Earth.
The streams of those goods-traffic were moving at break-neck speeds. But so too were the mounds of debt! Banks were no longer crusty old buildings with vaults of cash, deeds and gold - they were now virtual. Trading floors were now rooms full of screens, manned by people with the letters DM or DMS after their names. Money moved in milliseconds and credit agreements between banks lasted hours or even just minutes.
Then it happened! BANG! One of the streams broke down. It had been wobbly and suffering jams and back-ups since January 2007 and monetary economists had warned that it was over-heating since about 2005. But in September 2007, newly appointed risk manager John Breit at investment bank Merrill Lynch filed a report that just one derivative of a derivative of a debt bundle was close to worthless.
This news reached the desk of CEO Stan O'Neal and Breit was called for. He had to explain what it was - a synthetic collateralized debt obligation squared. A side-bet using borrowed money on a copy of a bundle of debt - a derivative of a derivative.
"How bad is it?"
"Six billion, but probably a whole lot more. We've got dozens of CDOs in the pipeline."
Breit had just informed one of the most powerful men on Wall Street that the party was over.
The rest, as they say in cheesy documentaries, is history.
Governments and central banks had to step in. They reached back in history to 1905 and to the teachings of an obscure German economist called Georg Friederich Knapp and 'Chartalism' theories of steering an economy by altering the money supply. This was taken up by a movement called Modern Monetary Theory and their advocacy of a quantitative money supply.
You can create money (quantitative easing) to boost the economy in depressed times and destroy money (quantitative tightening) to prevent it from overheating in boom times - and tightening also helps to steady the purchasing power of money and prevent inflation.
Thus was born a wave of quantitative easing around the world known as QE. And by the skin of their teeth, it sort of worked.
But then, just as Napoleon predicted, the world trembled - China awoke. And China got the MMT bug along with everyone else! And nobody wanted to tighten - we can print our way to prosperity, right?
And along came the C19 bug. Lockdown. Streams of goods slowed right down and some streams stopped flowing completely. QE2, QE3 and then what some have called QE-Buzz Lightyear ("To infinity and beyond!") was born.
With C19 came the need to keep whole economies afloat by direct means. Pay people and companies directly and another child was born - Helicopter Money! BBL, Stimmies, furlough payments, grants - trillions were created and fed directly into economies everywhere.
So here we are with a whole new set of problems -
Problem 1 - Everywhere we look, there are debt bubbles and they are huge beyond imagining. Government debt, private debt - more debt than anybody can ever repay. Debt that is given another name to hide the mountains of debt. Debt that must default, either by wild inflation or directly through bankrupcies.
Problem 2 - Our old friend inflation. First came asset price inflation - houses, then shares, then came the shortages and means of production inflated, followed by consumer durables such as cars. Now food prices and vital commodities are affected. Government statisticians were ordered to hide the inflation by altering the types of goods they survey - but people ain't stupid. You can't expect shoppers to pay 40% more for cane sugar and 34% more for petrol and tell them that inflation is now just 4.2% with a straight face - and expect anyone to believe you!
Problem 3 - The Roach Motel problem! The roaches check-in, but they don't check-out. Central banks cannot raise interest rates significantly, to stem inflation, as that would cause an avalanche of credit defaults. They can't leave things as they are, as that could cause inflation to accelerate. And they can't tighten as that will bring the economy to a grinding halt of stagnation.
Problem 4 - Climate change. It will cost us huge resources to adapt to a warmer climate. Yes, the world is getting warmer and do not expect any government to actually do anything concrete about reducing CO2 - they have elections to win (or in China, a teetering economy and billions of people to placate). And with climate change, come weather events that will cause more shortages - you can't plough a water-logged field, you can't harvest wheat in the rain - and you can't do anything if you are flooded out!
Problem 5 - Commodity shortages are everywhere. We are going green about 50 years too late! So now we are panicking. Oil companies were not allowed to drill for new wells, so that is in short supply. Gas - the same. And now all those electric cars need gold, silver, platinum and vast amounts of copper and other basic materials. But the big users and traders in those things have been manipulating the prices down, so nearly all commodities were under-priced - and because they were under-priced, new mines were not dug. So now their prices are about to explode, thereby making everything so much worse!
It puzzles me why the BoE is going to raise interest rates to combat inflation.
They and the CEB and the Fed cannot raise interest rates and they know it! What they are doing is TALKING about raising rates and reducing QE (that's 'tapering' in Wall Street jargon).
If there is any raise at all, it will be nominal and well below inflation. See the Roach Motel problem!
So, anybody got any bloody ideas?
Anyone?
Please!
(Asking for a friend!)
