Loading ...Oh, it’s here alright. But we’re a little squeamish about calling it out.
It constantly comes up: With all this central-bank money printing and the zero-interest-rate policies and the negative-interest-rate policies, and all these central-bank liquidity injections, in other words, with all these loosey-goosey monetary policies around the globe, why are we not seeing huge bouts of inflation?
And then, some folks take the next step and say: Well, since we’re not seeing big bouts of inflation, these loosey-goosey monetary policies should become standard, perhaps run by the government, instead of a central bank, and renamed Modern Monetary Theory, or whatever, because it will give us all this stuff for free and in terms of negative interest rates for better than free. This is finally the free lunch that we’ve been waiting for since the beginning of mankind.
But there is a fatal flaw in this logic. Turns out there
are huge bouts of inflation, pernicious dangerous inflation. Here, inflation means that the dollar, the euro, or whatever other currency is losing its purchasing power. But this inflation is less focused on prices of consumer goods and services, but on prices of assets. This includes nearly all asset classes: stocks, bonds, residential real estate, commercial real estate, and so on.
Assets are highly leveraged. When their prices rise, these higher prices are used as collateral for more debt, meaning banks and bondholders are on the hook when prices turn the other way, as asset prices do. And this is when asset-price inflation leads to – you guessed it – a banking crisis and a broader financial crisis.