Friday, September 10, 2021

Deniers of inflation as a problem approach a psychiatric diagnosis

I have thought about the (monetary) inflation a lot, perhaps more so than about cosmic inflation; monetary inflation is clearly a cheaper genre, however. ;-) You may look at some of the blog posts in the past that included comments about the interest rates, negative interest rates, inflation etc.



A German man is pushing his wallet in the Weimar Republic of the early 1920s, a century ago. In 2021, economists should know that such events are possible with irresponsible enough helicopter money policies. The problem is that many of them just don't care or they actively want to impose similar wallets on everyone again. With the digital money of the modern era, wheelbarrows could be avoided but the cash could disappear instead. This dependence of the citizens on the central authorities (that store their usable money) is attractive for lots of totalitarian pundits, of course.

Five or ten years ago, there was a fashionable opinion that the inflation would forever disappear and the interest rates would be zero and we would enter a new geological epoch in which the central banks would invent zero or negative rates forever. I have always emphasized that this "end of monetary history" idea was a complete nonsense and the negative interest rates were at most a short-term anomaly that simply couldn't last (much like the tunneling effect in which the apparent kinetic energy may drop to negative numbers for a while but it's not a sustainable situation because classically, the kinetic energy cannot be negative).

As long as people with some interests and skills live, the history can't be over, conflicts can't be over, science can't be over, recurring inflation can't be over (if someone uses fiat-like currencies). I think it's clear by now that I was completely right and the "economists" who were preaching zero or negative interest rates forever were completely wrong.



Among the articles in the recent past, there is a text criticizing the Turkish leader who is a complete crackpot when it comes to monetary policies because he denies the basic causal relationships between increased interest rates and decelerating inflation (in the future, a cure for the accelerating inflation in the past).



In May, I also wrote a blog post explaining why the European energy prices would go to the Moon. The correctness of that prediction becomes amazing if you look e.g. at the Central European Electricity Bourse PXE. In May, the Base Load Czech one-month prices were already around €70 per MWh, a significant increase from below-€45 in October 2020. But I knew that this was far from the end. These current Base Load one-month Czech prices are €120 now. You can get much higher numbers if you study the Peak Load (and) one-quarter prices. In the most expensive countries that are covered by this bourse, Romania and Hungary in this order, these prices are already €155 per MWh (the same price is just €101 in King Coal Poland).

So far, the arguments still hold so I still expect all these prices to keep on growing, especially if Western Europe doesn't stop its insane shoving of electric cars down the people's throats; and the closure of coal, sometimes even gas, and nuclear power plants (the nuclei will be declared Nazi objects in Germany by the end of 2022 and every single one will probably be closed). A much higher increase of the prices would be needed to compensate for this increased demand and decreased supply. At a one-month time scale, you need the price to jump 10% if you want to regain an equilibrium after a 1% increase of the demand or a 1% decrease of the supply.

In Czechia, the fresh figure is 4.1% year-on-year inflation. Economists' consensus expected a stagnation at 3.4%. Of course, I did expect a speedy growth towards 4% and I was right. And I do expect 5% to be touched in another month or two. The Czech currency strengthened by some 0.5% relatively to the U.S. dollar, CZK 25.33 per EUR is the strongest value since February 2020. The appreciating currency reduces a part of the inflationary pressures but it is not enough. Because of the limited and indirect relevant of the imports, I think that the crown needs to appreciate around 5% relatively to the relevant mixture of foreign currencies for the Czech consumer prices to drop 1%. We need a 20% appreciation to erase a 4% inflation.

Needless to say, this happens not just in Czechia, it happens almost everywhere, and this wave of inflation may be almost entirely blamed on the helicopter money poured by most governments as a compensation for the Covid-19 lockdowns that have restricted the economic activity. (Again, it is not the virus itself that has caused anything important in the society; it is the reaction to Covid or just plain random insanities in which Covid was used as an excuse, those are bringing all the havoc.) This helicopter money has saved many people's liquidity, living standards, preserved jobs etc. Quite a fraction of the people and companies saw their profits to skyrocket during the lockdown epoch. On the other hand, lots of ordinary people got lots of money for free, too. The money supply has grown by over 10% on a year-on-year basis and I think it's right to expect effectively two years like that.

So the money supply will have gotten some 20% extra boost thanks to these very generous, pro-inflationary helicopter money policies justified by the virus. That will be the case in many countries. What does it mean for the future behavior of inflation? I think that when some equilibrium resembling the pre-Covid equilibrium returns, all the cash and extra cash will spread more or less proportionally, and because there is 20% more of it (and it's pretty hard for any kind of money supply to drop), it means that all the numerical amounts (prices, rents, salaries...) will be 20% higher. We are already inside this process and it may last several years. I think that an extra 20% of inflation (the total inflation over the period-affected-by-Covidism) would already be in the pipeline, a scheduled future evolution. Of course, this evolution may be reduced by the increased interest rates but they will have to be rather intense to make an impact.

The idea that inflation will suddenly slide and return towards or below 2% in a few months seems like a crackpots' pipe dream to me. This kind of BS is being promoted by "doves", people who like inflation and unreasonably low interest rates (many of them know that their "predictions" will be proven wrong but they like to lie because they like the societal changes ignited by these lies), and I think that being a "dove" (or an "inflation denier" in the present context) is a type of extreme leftism. Why? Because such economic conditions make it easy and safe for everyone to borrow which is why there is not much difference between the people and companies who have earned and who can earn (lots of) money; and those who haven't or who can't. Very low interest rates unavoidably imply a certain degree of unnatural egalitarianism.

To say that "very low interest rates (even with high inflation) are objectively good" means to be a totally biased advocate of "certain kinds of people and economic subjects", generally the borrowers (and employees who would not be hired if the criteria were demanding). But every loan or a similar economic transaction has two sides. When a change of the economic policies (or the absence of such a change) is good for one side, it is unavoidably bad for the other side. So the lenders – mostly people and economic subjects who have done something good for others in the past and that's why they have the money – are punished when they aren't sufficiently compensated for the lending of their money. At some level, the very long-term real interest rates should be dictated and are dictated by genuinely free markets, by the people's authentic discounting of the future. But in reality, the programs to accelerate the economy have distorted the prices of almost everything, including the relative prices (the yield curve etc.), and the very long-term bonds which should still be determined by the free markets have become a mirage.

There is this conspiracy between leftists in the governments who want to pay bigger programs; and seemingly independent economists or central bankers. Much of it is paid from the debt and these projects are openly supported by many central banks – whose bankers should be impartial and independent of the government but in reality, they work to make it easier for the governments to waste the borrowed money. To some extent, "printing of the money" does create wealth but when central banks and governments do such things systematically for decades, a punishment unavoidably arrives. It can be manifested by bankruptcies of countries (like Greece) and if those are artificially avoided, the ultimate punishment is a very fast inflation. Inflation is how the "relative punishment of the successful ones" (by helping an undeserving person) manifests itself after some delay.

Central banks determine some important interest rates (what commercial banks get for their stored extra cash from the central banks where the cash is held, and the borrowers in the real economy must compete against this value of the interest rates) and they usually do so in order to keep the value of the currency predictable (pegged to something, an inflation basket of products and services; GDP, or something else). This is the right policy and much of the reactions (hiking of interest rates) should be almost automatic. The Czech National Bank targets a 2% inflation with the 1%-3% as the allowed window. 4.1% is clearly far away from the target and even from the interval so it is obvious that they must raise the interest rates. They should add bigger steps than just 0.25% a session (there are 8 sessions a year).

A slight majority of the Magnificent Seven central banks in my homeland seems to be sensible and they will be hiking the interest rates, and maybe more so than they did in the recent past. Their main role is to stabilize the value of the currency, to make the inflation with respect to something that was "nearly promised" predictable, and this is how they preserve the fairness of the economic transactions.

The countries further in the West (and the U.S. has become a canonical example) are full of economists and "economists" with an insanely strong bias towards the low interest rates and the denial of inflation. I have mentioned that many of them simply fight against meritocracy. And they fight for a big government which can spend as much as it wants because it has been turned into an omnipotent or totalitarian government. This is a setup they like. But it's clear that in the real terms, someone ultimately pays for this spending and the government is the most effective engine in the world when it comes to totally counterproductive wasting of the money.

So these leftist doves among the economists often spread the ideological thesis that it's not right to target just the inflation rate or similar variables. The bank must also think about the better economic output, growth, lower unemployment, and similar things that a socialist politician cares about. I am sorry but this whole ideology is pure BS. If you want to drive the interest rates and the value of a currency to levels that are optimal for the (totally real, not fabricated) economic growth, then you need to preserve a currency whose future value is precisely enough predictable so that the users of the currency may do a more rational planning of the future and they may think about the present economic transactions with less uncertainty. When you allow the currency to behave differently than what the people were promised, you help one side, punish the other, and unavoidably reduce the efficiency of the economic engines.

Yes, lower interest rates may indeed lead to a higher employment or lower unemployment. But it is not a healthy higher employment. Lots of these new jobs (or jobs that could have been terminated but they were not) are useless and they don't really produce real values. More precisely, very low or negative interest rates have erased most of the difference between "good work" and "promises" because the weak projects or employees that will almost certainly not lead to a profit are still "promising" that their long-term impact is positive (but it's not). The promises (even deceitful ones) become more tolerated when the interest rates are low.

Equally importantly, if the interest rates are artificially deformed to be lower than they should be in the free markets, it means that people lose the motivation to do extra work, to earn extra money, and to lend the extra money to someone i.e. to do a genuine real world investment into projects that carry nonzero risk but real possible benefits. People may still earn money but they earn money by some economic speculation instead of doing real world projects.

So I am pretty much certain that if you want to increase the economic growth over the next 100 years, in the totally real terms, then you should better target the inflation rate. To deny the problem of inflation and to keep the interest rates lower than they should be means to be a biased advocate of one side, and it is arguably the side that is less important for the future economic growth. In other words, all these dovish economists and "economists" are basically socialists who say that some form of socialism is good and the markets deformed by governments and left-wing ideological central bankers are better than the free markets; an ad hoc deformations of all the prices and rates are better than to fulfill the promises, they actually believe. Well, they are not better. And that is why the optimal central banks' monetary policy is a completely neutral one, one that actually tries to fulfill the promises or softly validated expectations about the inflation, either on a year-on-year basis or a 3-years-on-3-years basis.

According to all these methodologies, the Czech inflation has gotten way above all the promises and expectations and it is very clear that further hikes, and probably much more assertive hikes, are absolutely needed. It's true in most countries. It is curious that exactly a sensible nation of Europe and a quasi-sensible nation, namely Hungary and Czechia in this order, has central bankers that started to hike the interest rates way before everyone else. And it seems bizarre to me that our friends in Poland have quite some extreme doves in the central bank. (Slovakia is using the Euro and has surrendered the control over the monetary policies.)

The Covid-linked helicopter money will have increased the money supply by 20% or so and that is the total inflation rate that would be guaranteed to be "in the pipeline" if the monetary conditions weren't made more restrictive. There may even be a strictly mathematical proof of this inequality. If you don't want these 20% amounts to materialize and be extended by additional ones that are created from the prolonged inflation expectations, you simply need to tighten the economic conditions and you should better do it soon and vigorously.

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