Naturalmoney.org
the plan for the future
  
 

The 'sudden' wave of inflation


19 March 2022 (latest revision: 6 April 2022)


 
Monetary Revolution
Monetary Revolution
 


Inflation has three core causes. Cost-push inflation occurs when prices rise due to increases in the cost of wages and materials, while demand-pull inflation happens when prices rise because of a shortage of goods and services. Monetary inflation occurs when prices rise because there is more money in circulation. In 2010, the Fed embarked upon an unprecedented money printing experiment called Quantitative Easing (QE). In the following decade, asset prices like stocks and real estate rose to unprecedented levels. For a long time, price inflation remained relatively low, but recently, that suddenly changed.

The immediate cause is the shutdown of factories during the corona crisis and the resulting low inventories. When the economy picked up, lots of money started chasing few goods, causing demand-pull inflation. Energy prices and transportation costs went up, which added cost-push inflation. And then, a war started in Ukraine, making matters even worse. The fiscal and monetary policies of the previous decade made surging inflation an accident waiting to happen. It is a miracle that it took that long. Interest rates are now rising, and central banks may start tightening.

Traditional wisdom holds that central banks are behind the curve and should raise interest rates to levels not seen for over two decades. It also appears that the window of opportunity for implementing Natural Money is gone, at least for now. There are, however, a few things to consider. Long-term interest rates are still low, and real rates are now steeply negative and near -5%. Many consumers are heavily in debt, and inflation erodes their purchasing power, so a recession is highly likely. Raising interest rates to a modest level like 4% may push the economy into a depression.

Natural Money comes with an alternative for raising interest rates, which is setting a maximum interest rate to phase out the most usurious forms of credit. The next step is lowering the maximum interest rate to curtail credit further so that the monetary inflation reverses. People do not need to go further into debt. Instead, they need lower interest rates on their existing debts. Monetary policy cannot solve the issues on the supply and the demand side. Money is not in short supply, nor is raising interest rates a good idea.