Money Times: Is old fashioned inflation rearing its ugly head again?
Consumer Price Inflation, that ever changing basket of goods and services that are poured over by government statisticians seldom have much relevance to your personal basket.
For example, the official CPI figures from the Central Statistics Office claims that overall, consumer prices have risen by 1.6% in the past year compared to June 2020. In the UK, their CPI has risen by 2.5% and in the United States, its core index (which excludes energy and food) up on by a whopping 5.4% compared to June 2020.
The main reasons for this pick up in the price of stuff is because our economies are experiencing a surge in spending after long lockdowns due to the pandemic., say many economists. Others also give credence to the staggering surge in money printing by central banks since the pandemic began to support and stimulate struggling companies. The rate of money ‘printing’, or perhaps more correctly ‘digitalising’ has far outstripped that created after the 2008 financial crash.
In the United States, their annual budget deficit is now $2 trillion and is forecast to be $3.13 trillion by the end of 2021. The US budget was last balanced under the Clinton administration. President Biden intends to add another $3-$4 trillion of ‘stimulus’ on top of the $1.9 trillion already printed since he took office. Most of this ‘money’ is being earmarked for grand infrastructure, employment and social development projects. He has cited President Roosevelt’s great depression New Deal programme as his spending model.
To pull off his massive deficit spending programme, and to stop the collapse in US gold reserves as the preferred method of international trade settlements, Roosevelt first signed Executive Order 6102 which forced all Americans to exchange their gold coins, bullion or certificates for paper dollars. The exchange rate they were given was $20.67 in paper dollars per troy ounce.
The next year, the Gold Reserve Act of 1934 ended all private holdings of gold and allowed Roosevelt to set the gold value of the dollar by proclamation at $35 dollars to the ounce. This massive devaluation of the US dollar ended the classic Gold Standard. When Richard Nixon ended even that link in 1973, the price of gold floated on global markets. At time of writing it was worth $1,824 an ounce and unlike every fiat currency ever printed, still maintains its spending power.
Abandoning the gold standard has allowed countries, businesses and individuals, via their central banks’ printing presses, to spend their way out of periodic economic depressions, not to mention fund countless, useless, decades- long wars (Vietnam, Iraq and Afghanistan, not to mention wars against poverty, and drugs) and to let so many of us to live beyond our means.
The consequence is crushing volumes of debt: the US national debt is now c$27.5 trillion (it was c$500 billion when Ronald Reagan became president.) Here in Ireland where we rely on the ECB printing presses to print new credit lines for us and to borrow from foreign lenders. The National Treasury Management Agency reckons our national debt could reach €240 billion by the end of this year. It was c€50 billion at the end of 2007.
Via ‘quantitative easing’ – the printing of money to buy assets and debt in order to ‘stimulate’ struggling EU economies, the ECB balance sheet is now worth about €7 trillion. It has helped the stock markets to soar and enrich global property investment companies as well as those of us lucky enough to own personal pension funds and our own homes, to the detriment of those on the other side of the yawning wealth gap.
Back to the inflation risk: the price of Irish housing and utilities, like electricity and gas have gone up +4.1% in the past year according to the CSO, but transport costs are up by +3.1%, health costs by +2.4% to June and restaurants and hotels by +1.7%. (The cost of food, the second most expensive outlay for most people after housing has dropped by -1.9% since last year says the CSO offsetting some of these higher costs, but their arbitrary selection of food makes me question that figure. My food costs seem a lot higher today than three or five years ago.)
Should we be worried about the return of the kind of price inflation that we saw in the 1970s and 80s that caused such devastation to businesses and employment? (A recent survey of from Taxback.com found that 54% of Irish taxpayers surveyed regularly worry about money with 40% particularly worried about unexpected financial events.)
Or have the central bankers tamed the inflation beast forever with their magical QE, decreeing that deficits and unpayable national debts are of no consequence anymore (except to lowly taxpayers)?