The trillions of dollars, euro, yens, Yuan etc. created by the central banks since the 2008 crisis haven’t triggered any wave of inflation, contrary to what history has been teaching thus far. But should we underestimate the risk? Of course not.
This mass of money created out of thin air by the central banks has not generated higher prices for a very simple reason: instead of being invested in the economy, it has remained idle in the banks. All of this money is “frozen” – the most part at the central banks themselves!
Let me explain: central banks print money in order to buy back sovereign and corporate bonds, thus providing governments and corporations tons of liquidity. But very little of that money finds its way into the real economy – demand is weak, stringent solvency requirements keep businesses from borrowing, opportunities do not abound, due to a weak recovery. On the other hand, banks have stopped lending to each other because after the 2008 crisis, they lost confidence in one another; so the interbank market is idling. Banks prefer parking their money where they are 100% sure to get it back – with central banks.
The central banks’ objective, with these buybacks, was to lower interest rates to make credit more accessible to businesses and consumers. Well, we do have zero or negative interest rates, but there has been no economic recovery. If interventionism worked, the USSR would have become the first world power... but the economy doesn’t work like that.
This money goes around without touching ground, so to speak, so there is no risk of inflation on the horizon. Part of it finds its way into financial markets – dangerously fuelling them – but that’s all. However, the current context could change. What could make this money reach the “real economy”? A strong economic recovery, perhaps, which would provoke a strong rise in business loans, investments, salaries and, finally, prices? Let’s stop dreaming here: the paralysis of our economies is quite severe, especially due to taxes and regulations (this is where governments should act!). Zero rates are putting the brakes on Schumpeter’s “creative destruction” by letting lame ducks continue to get financing.
Let’s rather look for the variables that could change suddenly, such as:
- A rise in the price of commodities, especially oil (which depends more on geopolitics than the markets), which would spread to all other sectors.
- A crash of one or more currencies (the yen comes to mind with a public debt at 300% of Japan’s GDP) which would de facto inflate local prices.
- A new banking crisis that would require central banks to print more (the EU comes to mind with its Italian and even German banks), thus causing a loss of faith in the currencies, leading to “money runs”.
- Savers facing negative yields could flock massively toward real assets (the EU comes to mind again), making their prices explode upward (many will then realise that physical gold offers the best protection against this inflation).
The trigger may come one day or another, surprising everyone. Anyhow, the risk of inflation remains one of the biggest Black Swans that could hit us for the months and years to come.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.