UNITED STATES (OBSERVATORY) – The US dollar, the euro, the Japanese yen or the British pound – after the financial and economic crisis of 2008/2009. a number of commentators drew a rather gloomy picture of their future: high inflation, hyperinflation, even collapse.
However, this did not happen. Instead, the money for money, it seems, is still in high demand. For example, in the US, the balance of fiat money in relation to income is at a record high.
Why? Market manipulation of central banks prevented defaults on loans: politicians sharply lowered interest rates and introduced new funds into the banking system. Looking back, it is understandable why these operations prevented the collapse of the debt pyramid: 2008/2009. turned out to be a period of the “credit crisis”.
Investors feared that states, banks, consumers and companies could not afford further debt servicing, while investors were not afraid that inflation would reduce the purchasing power of their currencies, as evidenced by a drop in inflation expectations in the crisis period.
Central banks, no doubt, can cope with the scenario of default on loans. As monopoly money producers, central banks can provide financially sick borrowers with any amount necessary to keep them afloat. In fact, a simple confidence on the part of central banks is to hold a bail-out financial system, if necessary, enough to calm financial markets and force banks to refinance repayment of debts and even extend a new loan. The cheap and easy financing from the central banks forced lenders and borrowers to return to the credit market. Debt “zagul” can continue.
Unprecedented market intervention by the authorities not only did not lead to the collapse of the debt pyramid, but also resumed the economic recovery, which, however, significantly increased the debt burden of the world economy. From the end of 2007 to the third quarter of 2017, world debt grew by almost 35 percentage points to 245% of world GDP. It is especially interesting that the growth in debt over the past decades has occurred against the backdrop of reduced borrowing costs.
Approximation of the maturity of the debt, as well as a new debt, was financed at very low interest rates. As a result, it can be assumed that economic activity will depend on the continuation of the expansionary monetary policy of central banks more than ever. If interest rates remain artificially low, the global boom has good chances of continuation. However, if interest rates rise and reach too high levels, the boom will go into decline. Against this background, the monetary and credit policy that governments, banks, large and small companies, trade unions, workers, shareholders and investors demand is obvious: “Keep going, no matter what.”
As soon as there is a certain hesitation in economic activity, due to the increase in interest rates of central banks or political interventions in a negative way (“trade wars”, for example), it can be assumed that central banks will return to the “expansionist” policy of lower interest rates, greater lending and creation of money. It is clear to what all this will lead. Ludwig von Mises briefly noted: “According to the public, rising inflation and increasing creditworthiness are the only means against evil that leads to inflation and credit expansion.”
The effect of artificially lowered interest rates will cause great economic damage. It prevents savings, increases consumption and encourages investment – a type of investment that would not have been possible, had it not been for lower interest rates. Artificially lowered borrowing costs increase the debt burden of consumers, firms and governments.
The result is a distortion of the structure of production and the employment market in the economy. To keep the boom and prevent a recession, central banks lower interest rates, making sure that the loan and money supply continue to grow.
Although such a monetary policy can sometimes hinder credit crises, it can eventually lead to a “currency crisis”. Investors fear that in the case of a currency crisis, the purchasing power of their money will decrease.
The currency crisis would become a serious threat to the monetary system, perhaps even exceeding the drama of the credit crisis. This is due to the fact that central banks will have to dispel concern over inflation among people, tightening monetary policy, so that everyone sees: the growth of interest rates and the prevalence of growth in lending and money supply. This, of course, would deal a huge blow to financially overheated economies.
However, it should not be premature to conclude that the next turmoil will necessarily turn into a currency crisis. We can witness another credit crisis. Who knows? The decisive factor is the demand of people for money: as long as demand for the currency of the currency will go on par with the growth of supply, central banks will all get away with it. For in this case, any increase in the supply of a fiat currency will be readily supported by people, while inflation of prices for goods and assets remains under control.
But is there really a demand for money? As mentioned earlier, in the US, monetary reserves relative to GDP are at a record level. At the same time, stock prices and housing prices increased significantly. This suggests that consumers and firms did not simply leave their increased cash holdings inactive, but exchanged them for acquiring assets. Since money is offered in respect of shares and real estate, prices for these goods are growing, reducing the purchasing power of money – a process that is not reflected in the official statistics of consumer prices.
Financial crises of 2000/2001 and 2008/2009. led to an increase in inflationary monetary policy. This is evidenced by the continued expansion of the amount of money due to the expansion of the loan in comparison with the volume of production, due to low interest rates. Symptoms of this strategy are the growth of consumer prices and asset prices, such as stock and housing prices.
Undoubtedly, it would be erroneous to accept the widespread idea that price inflation is not a problem or that the current monetary policy will not lead to inflation. The truth is that inflation persists. How long will the inflationary policy last?
Here is what Mises answers: “Probably, while people are convinced that the government will sooner or later stop printing money and thus stop reducing the cost of each unit of money.” When people stop believing in this when they understand that the government will continue to implement its strategy further, without signs of a stop, they begin to understand that tomorrow prices will be higher than today, then they start buying at any price, which leads to an increase in prices to such heights that end with the collapse of the monetary system. ”
However, inflation is a policy created by a person, and it can be stopped at any time. Unfortunately, so far few people support the idea of stopping the inflation of the economy – from academic circles, politicians and the general public. Under such conditions, it can be expected that central banks will continue to shamelessly implement their strategy further, until the opportunities for inflation are fully exhausted. However, given that price inflation can persist for quite a long time, the risk of a currency crisis is growing every day.
Fears that this may be a currency crisis, which will eventually lead the system to the collapse of fiat money, is not an exaggeration.