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The View | The real answer to inflation that no one wants to hear: stop spending
- Central banks are assuring markets they are dealing with spiralling inflation while doing nothing of the sort
- That’s because the only solution is to cut the flow of money, but neither governments nor markets are ready to reform their high-spending and highly speculative habits
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Why you can trust SCMP
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The US Federal Reserve and other central banks are trying to convince financial markets that they will do everything possible to contain inflation.
To buy themselves time, the banks are playing psychological tricks on the market. While they are raising interest rates, they are not stemming the supply of new money that began when Covid-19 hit, which is the least that is required to contain inflation.
Stimulus spending has led to massive fiscal deficits and debt-fuelled housing inflation. Rolling it back would lead to a crisis bigger than that of 2008. The central banks intend to inflate away excess debt, but want to keep bondholders in the dark about it; as the Chinese saying goes, it’s best to boil frogs slowly, because they don’t jump.
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Experts, central bankers and politicians are all talking about inflation. But they don’t talk about how we got here; instead, they emphasise the impact of the Ukrainian war. While there are many factors at play, the ultimate cause is excess monetary expansion since 2008 and its acceleration during the pandemic.
To deal with inflation properly, it’s important to understand why, for many years, the excess supply of money did not lead to inflation, what happened during this long lag, and why the dam separating money and inflation has now broken.
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