Inflation: Central Banks Are Playing with Fire

Inflation is already a global reality. Consumer prices in April had risen by 2% in the Eurozone (even Germany is at 2.5%), by 3.3% on average in the OECD and 4.2% in the U.S. The Eurozone figures challenge the ECB policy target of “close to, but below 2%”, raising the question of whether the Frankfurt-based bank will change monetary policy.

The answer is no. A tightening of monetary policy, either by the Fed or the ECB would blow up the global assets bubble, and bring down the entire financial system. Under the current system, as Lyndon LaRouche often pointed out, central banks have only one option, and that is to keep printing money to prevent a chain-reaction bankruptcy of the system.

On that backdrop, both the Fed and the ECB insist that the current inflationary wave is only transitory. The ECB is conducting a policy review and discussing whether to introduce a “flexible” inflation target, the result of which will be made known in September. So in one way or another, the expansionary monetary policy will lead to a hyperinflationary explosion. After all, the most famous hyperinflation in modern times, in the Weimar Republic, was “transitory”: it built up for two years and then rose in one year to a 9-digit figure.

So far, central banks have been able to contain inflation to the financial assets sector, but it will spill over into the real economy. This has in part already occurred with commodity prices.

The Bloomberg Commodities price index is at almost 95, up from 65 one year ago. Copper and steel, but also palladium (+41%) and silver (+63%) show record highs; timber prices have quadrupled in one year, oil has doubled, pushing gas, plastic, insulators and bitumen (+16%) up, while biofuels are also rising, with maize at +107% and sugar cane at +47%.

Construction costs now endanger the entire sector, with firms unable to cover costs on contracts that were often concluded years ago. Nonetheless, EU governments seem willing to let “creative destruction” continue apace.

In this context, an article by Bundestag president and former Finance Minister Wolfgang Schäuble first published on April 16 on Project Syndicate was republished in the June 3 Financial Times, in which he warns about rising inflation as a consequence of growing government debt and calls for a mechanism to enforce fiscal austerity on “debt sinner” countries in the EU. In doing so, Schäuble evokes Alexander Hamilton, the first Treasury Secretary of the United States, comparing his own scheme to Hamilton’s “sinking fund” for the U.S., which he called “a confederation of states” of the type that the EU should adopt.

Contrary to what Schäuble says, the EU is not (or not yet) a confederal state. This makes his argument null and void. Moreover, it is not possible to isolate one secondary element of Hamilton’s national credit system from all the other elements, including a National Bank with the mandate of supporting national credit (debt), the development of manufactures and a protectionist trade policy.

Nonetheless, Schäuble has the merit of making his hardline proposals public, which can only help strengthen anti-EU forces.