Inflation is here to whittle away their debts

Inflation is here to whittle way their debts. By David Evans.

The last link between our paper currencies and gold was cut in 1971. Henceforth money printing was no longer constrained by the supply of gold.

 

 

Since 1971, the amount of money in the world has increased dramatically, far more than the population or the amount of goods and services on offer. So prices have gone way up. For instance, in 1971 a house in the US or Australia typically cost about $20k.

Inflation is currently heating up. Why now? As I predicted publicly in speeches in 2011 – 2012, the central banks are attempting to run a true inflation rate of about 10 – 15% in order to reduce the value of the huge amount of debt. It has started. It is not obvious yet, because the inflation measures (principally the CPI) were deliberately tampered with to make inflation seem smaller than it really is.

Under our current money system, money is debt — every dollar is someones IOU, created by the act of borrowing from a bank. The amount of money is thus equal to the amount of debt.

Voters prefer having more money, so the political pressure to lower interest rates and make borrowing easier has been immense. The obvious happened: since 1971 (or more particularly since 1982, after a decade in which inflation was seen to be brought under control so people could trust paper currencies), the ratio of debt to GDP reached historical highs like in 1929 — and then a whole lot more:

 

 

By 2008 the debt bubble could not grow further and started to collapse (the “global financial crisis”, or GFC). Since then governments stepped in and took over from the private sector to do much of the heavy lifting of borrowing. But since then we’ve had a stagnant economy, weighted down by all that debt — and a steadily widening gap between rich and poor. The central banks, who are in charge of the money system, have basically two possible remedies.

The first is deflation. Raise interest rates and reduce the rate of debt expansion, or even reduce debt. This was the response to the 1929 crisis, and the results were appalling. Furthermore, it is a non-starter today because most governments have too much debt. For example, if the interest rate in Japan reaches 2% then the Japanese Government has to spend its entire tax income just to pay the interest on its bonds — so interest rates in Japan will not exceed 2% any time soon.

The second is inflation. A few years of inflation will whittle away the value of the debt currently held. Hold a million dollar mortgage? Ten years of inflation at 10% will mean it is only worth as much as $350k today — $650k just vanished (effectively the lender pays for it as a loss of his purchasing power, but you benefit).

Just hold down interest rates, a bit of money printing, maybe some massive government spending — all politically popular in the short term. To get us back to an historically-normal debt-GDP ratio of 150%, at an inflation rate of 10 – 15% (tolerable, as in the 1970s, without risking hyperinflation), might take about 15 years. Until about 2035, if all holds steady (it probably won’t).

Most people don’t understand inflation, and it will take years for the general public to catch on. Some businesses will go bust under the inflationary approach, but at least it won’t be the economic cataclysm of 1930s America. The politicians and banks were always destined to choose the inflationary route. After 2009 and economic stagnation set in, something had to be done. It’s taken a while of dithering, but finally with the covid money printing we have started down the inflationary path.