March 10, 2017
Just as everyone was finally accepting the idea of deflation and
negative interest rates, inflation decides to pay a return visit. In the
past day, articles with the following headlines appeared in major
publications around the world:
Swiss inflation rises at highest monthly rate in 5 years
China February producer inflation fastest in nearly nine years
Year-over-year import prices at highest level in five years
ECB keeps bond-buying, rates unchanged amid inflation flare-up
Food inflation doubles in a month as UK shoppers start to feel the pinch
What happened? Well, towards the end of 2015 most of the world’s
major governments apparently got spooked by deflation and decided to
ramp up their borrowing and money creation. China, for instance,
generated the following stats in 2016:
- New loans totaling 12.65 trillion yuan, or $1.8 trillion.
- M2 money supply growth of 11%.
- Debt-to-GDP ratio jump from 254% to 277%.
In Europe, the European Central Bank ramped up its bond buying
program, pumping about a trillion newly-created euros into the
And the US increased its federal government debt by over $1 trillion,
presumably spending the proceeds on things that raise wages or increase
the demand for commodities.
Since there’s no way for the growth of global production to match
this blistering pace of new money creation, the result is higher prices
for just about everything. Oil and most other industrial materials are
more expensive, wages are rising, long-term interest rates (the cost of
money) are up; you name it, it went up in the past year.
What comes after a debt-driven spike in inflation? History is pretty
clear on this one: instability, as rising interest rates spook the fixed
income markets and rising business costs spook stock speculators. Toss
in global political upheaval as populism (the inevitable result of
previous bad policies) sweeps the globe, and the “Great Moderation” of
the past year – which was as it turns out just a bunch of clueless
people borrowing a ton of money – will give way to something a lot more
The only amusing part of what’s coming will be the disarray among the
economists and politicians who have been advocating a higher inflation
target, as if a modern economy is a thermostat that can be dialed up and
then back down by an omniscient homeowner. As
Jim Rickards likes to say, it’s not a thermostat, but a nuclear reactor that can, if allowed to get too far out of balance, go critical.
John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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