Central banks fulfil precisely two functions in the postmodern economy:
- They monetize the rising mountains of national debt and at the same time finance ideological projects that would never have seen the light of day on the free market.
- They serve the Cantillon Effect to enrich ruling elites at the expense of the middle and lower classes. This effect is amply documented in the literature and follows the logic that those who are closer to the money printer receive the newly printed money first and can thus acquire assets that protect them from inflation. So one thing is certain: inflation has not disappeared, it is merely declining because some large economies, such as China's, are experiencing deflation.
What To Expect?
So what can we expect in the near future? We have two eminent examples from the economic past: the inflationary waves of the 1930s and 1940s and the waves of the 1970s. If we follow these two historically documented examples, we can expect the second, more severe wave of inflation in just a few months' time. The question is, what will trigger it? In my opinion, deflationary shocks that the fiat money system cannot compensate for will lead to monetary policy once again following the Keynesian logic and closing the gaps with fresh liquidity. We are familiar with this from the major financial market crisis and have seen it in the bailouts of banks, insurance companies and large corporations. Tax payer, beware the Ides of the great rug pull!
Antagonistic Policy Approach
American politics provides us with a good example these days, with inflationary and deflationary forces currently wrestling with each other for dominance. While the Federal Reserve is trying to implement a restrictive monetary policy, the US government is flooding the markets with fresh debt instruments that serve as collateral for the so-called Eurodollar system.
What we can observe, however, is that global liquidity is rising, not least due to China's massive intervention in its stock markets, which have been in free fall for months. So it remains exciting and it cannot be assumed that inflation will ever disappear from our lives.