Central Banks, Helicopter Money, and the Low Inflation Myth

Albert Einstein famously defined insanity as the act of doing the same thing over and over again and expecting different results. Had he lived to witness the present, Einstein would’ve found himself confronted by insanity everywhere he looked.

Nowhere, perhaps, would this be clearer than in the case of central banks.

That central banking efforts to prop up economic growth have failed so spectacularly is no great surprise. That these policies continue to be lauded, despite the futility of such measures, is, however, of great concern.

But have bankers learned anything? Have they seen enough to realise their experiment hasn’t worked? No, of course not, because this isn’t a learning exercise for them. To focus on the efficacy of central bank policymaking would be to miss the point of their existence in the first place. Central banks have willingly created a system which enriches the banking cartel at the expense of everyone else. Only this would explain the deliberate nature of their actions.

The reason why insanity continues to prevail is because it benefits those who create the conditions for it.

In that respect, central banks aren’t doing the same thing over and over again and expecting different results. They’re getting exactly the results they’re looking for. Seen from the point of view of a banker, it’s an experiment that has been wildly successful.

So it comes as no surprise that Citibank chief global economist Willem Buiter is pushing for ever more central banking intervention.

Buiter has urged struggling economies to stimulate growth and fix long-term unemployment with so-called ‘helicopter money’. This is a process in which central banks fund government deficit spending by creating new money. The ABC reports:

Today’s unemployment creates the future unemployables — it leads to the deskilling and it leads to the stigmatisation of the unemployed. [Intervening to boost a struggling private sector that’s not willing to invest could be done] most likely by deregulation or sensible tax reforms, infrastructure spending would also helpCorporate tax cuts would be an obvious example, infrastructure investment, depending on the country, likewise.’

In Buiter’s estimation, helicopter money is ideal for economies with high public debt and below-target inflation. Australia meets both criteria. Total public debt stands at some $759 billion, while inflation, at 1.3%, is below the RBA’s targeted 2–3%.

But wouldn’t this only lead to higher inflation as it erodes the value of the Aussie dollar? Not if you believe the official story on inflation. As central banks will have you believe, hyperinflation can’t exist in a world where deflation is the real enemy. The ABC reports:

In the past [helicopter money] has led to hyperinflation, such as famously in the German Weimar Republic of the 1920s. However, Dr Bruiter said the current environment of low inflation, and even deflation in some areas, is a perfect one for helicopter money to succeed.

But is that true?

Tackling the inflation myth one lie at a time

Australia’s official rate of inflation supposedly sits at 1.3%. That would seemingly back up Mr Buiter’s assessment that helicopter money wouldn’t send inflation skyrocketing. In fact, it might even be advantageous to boost inflation in order to stave off the dreaded deflation. Or so bankers might argue.

Except, we all know that 1.3% figure is way off the mark. And you don’t need any statistics to tell you that.

You feel it every time you’re out buying groceries. You see it reflected in your bills, which seem to rise incrementally year on year.

It might reassure you to hear that policymakers are taming inflation. But beyond this figure lies a different reality for many, reminding them of the real effects of hidden inflation — one that hides in plain sight.

How can we be sure?

As mentioned, you’ll have noticed that creeping rise of consumer prices. And, if you’re like most Aussies, you’ll know your wages have barely grown over the last five years. In fact, wages are rising at their slowest pace on record (2.1% in the year to March 2016).

The price of goods and services is rising, but wages are flat lining.

Which brings us to the next point.

If inflation really is at 1.3%, why are prices going up? Moreover, is there any link between rising prices and stagnant wages?

Well, the reason why the price of goods is going up, and why wage growth remains flat, is because the value of the Australia dollar has eroded.

The inflation rate doesn’t suggest it, but your everyday experience tells you otherwise. You know this because your dollars don’t take you as far as they used to — regardless of what the consumer price index indicates.

Part of the reason why the Aussie dollar has lost its value is because of reckless central bank policies, which have done little but increase real inflation and inflate asset prices. Cutting rates and increasing the money supply in the system tend to have that kind of effect…

Of course, it serves the central banks to have ‘official’ low inflation, because they can keep lending to commercial banks, who they ultimately serve. They can keep increasing the monetary supply ad infinitum. If anyone doubts their actions, they point to that stubbornly low ‘official’ inflation rate and carry on printing.

All the while, real inflation is springing up in the form of aforementioned weak wages growth and rising consumer prices.

If you needed any more evidence that there is too much money in the system (which invariably suggests underlying inflation), look at asset prices. The reason why there is so much money tied up in Aussie real estate and stocks is because there is too much of it in the system.

This idea that 1.3% inflation goes hand in hand with the kind of asset price bubbles we have in Australia defies all logic. The excess supply of money was not created through a natural process of wealth creation. We aren’t producing, manufacturing or exporting more to keep up with the creation of new money.

So anytime the money supply expands, as it has, it has no choice but to erode the purchasing power of consumers.

When hidden inflation reveals itself

That Australia doesn’t yet resemble the Weimar Republic of the 1920s doesn’t mean it won’t.

The modern day financial system, with the complexity of interactions between central banks, is far more multifaceted than it was. Even now, it is difficult to explain how this ruse is orchestrated as well as it has been, and continues to be.

In any case, in today’s world, manipulating the inflation rate is a means through which to continue justifying stimulus measures. As long as that remains the case, expect the story of inflation to remain hidden in plain sight.

Mat Spasic,

Contributor, Markets and Money

PS: The RBA left interest rates at a record low of 1.75% last month. According to Markets and Money’s Phil Anderson, interest rates are likely to remain low for a long time to come.

In his latest report, Why Interest Rates Could Stay Low for the 21st Century, he warns that you won’t be able to rely on your savings to fund your retirement. As Phil says, inflation — from low rates — is eating into your savings. You can’t rely on savings accounts or term deposits for your retirement. The regular return on a term deposit has halved in the last four years alone!

That’s why Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four pronged strategy that’ll boost your wealth. You’ll learn where to park your cash over the coming decades to potentially profit in the coming low interest rate environment. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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