The government and central banks have backed themselves – and all of us – into a corner.
Despite a massive surge in debt, huge budget deficits, and a rapid increase in the money supply, inflation is staying under control.
At least, that’s what the government is telling us.
But does that fit with what we are seeing all around us?
Do food prices seem stable?
How about the housing market, which continues to behave in absurd ways?
Does anyone actually feel like things are staying affordable?
No, our own experience and acknowledgment of reality tells us that inflation is all around, regardless of what the government claims.
Consider the stock market, which has performed quite well, something that makes very little sense considering the economic calamity we’ve just been through.
Yet, it makes sense if you consider that easy money and rapid expansion of the money supply quickly makes its way to banks and investors and drives up the price of assets.
None of this is based on true economic fundamentals.
Instead, we are seeing the consequences of central banks and profligate governments backing us into a corner.
They kept putting off any return to fiscal responsibility by going further into debt (even in good times), and printing more and more money and keeping interest rates low whenever a downturn loomed.
As a result, debt has surged at all levels (even before the crisis), and we face a situation in which leaving interest rates low continues incentivizing more debt accumulation, while raising interest rates will cause a serious correction that will reduce the incentive to take on debt, but at the expense of a sharp temporary downturn.
Of course, as I’ve said before, economic reality cannot be evaded forever. Sooner or later continued increases in debt, low interest rates, and expansion of the money supply will generate inflation, and we’re already seeing it happen.
Sooner or later, the evidence will be so obvious that even governments can’t hide it from all of us, and a return to fiscal responsibility will be a necessity, not a choice.