September 30, 2022

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The powerful lobby that has no interest in extinguishing inflation | Federico Rambini

Is there a big, dirty secret that prevents us from detecting inflation? If there is, it is called religion.

Inflation reduces it, therefore There is a very powerful lobby which has Unspeakable interest not to smash price increases: The biggest debtors on the planet, starting with countries.

A thread I draw from Villa d’Este-Cernobbio’s concerns Ambrosetti . Forum interest rate scenario.

We are on the eve of new heights by both the Federal Reserve and the European Central Bank. When it comes to the next recession – or a recession that has actually started – monetary tightening is one of the reasons cited. But what pressure are we talking about?

At the moment, interest rates are still largely negativeless than inflation.

This is true for the key rates of the central bank, which are a measure of the compensation required to provide credit to commercial banks; It also applies to government bond yields. for example, In the US, short-term (two-year) Treasury yields are around 3.5%.. Those 10 years yield just under 3.3%. These benefits that the Treasury Department in Washington pays to investors can be compared with Inflation rate is 9%. annual. The real rate is the return adjusted for inflation. Therefore, it remains overwhelmingly negative, despite the recent hikes in interest rates. (We started from scratch).

The concept of a non-theoretical real rate has important practical consequences. A negative return means that savers are not protected from the erosion of the value of their savings: the returns they receive are not enough to maintain the purchasing power of their money. This means, for example, that Many future retirees or retirees are getting poorer If their savings are invested in Treasuries: When they reach the maturity date, the value of the principal decreases.

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It results in a negative return, at the macroeconomic level, Transfer of wealth from creditors to debtors. We know that states are among the largest debtors. Therefore, despite the high cost of money, Countries reduce their debt burden with inflation.

A classic mechanism has worked in other historical periods: inflation reduces the real weight of public and private debt.

The current monetary tightening is actually very little constraining, at least for now, when compared to what central banks did in the 1980s. To deal with the inflation that has erupted since the two oil shocks of the 1970s. In the 1980s, led by Federal Reserve Chairman Paul Volcker, central bankers were able to recover positive real returns. Today they are far from that goal. To get higher rates of inflation, the Fed and the European Central Bank must continue to operate in very strong increments for a very long time. Some experts present at the Ambrositi Forum in Cernobbio believe that central banks will not be as specific as they were in the 1980s and will give up on raising interest rates to the level that Volcker saw fit to crush inflation.

Someone argued that today’s central banks would be afraid first. Want the social consequences of It is a pressure that will bring a huge return of unemployment. (Yesterday the US number for August was positive, +315,000 jobs, but it slows compared to previous months.) Do you want why we live in it A world with too much debt, too much sovereign debtCountries have a great interest in allowing inflation to flow to reduce their debt burden; While an excessively persistent increase in interest rates would make sovereign bankruptcies more likely (Italy will also enter a phase of significant fragility given its level of public debt).

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In the 1980s, debt/GDP ratios were a small part of current ratios.

If these assumptions are correct, then We will live a long time with higher inflation than we used to in the past forty years.

In addition to the interest of states in imposing a hidden inflation tax on savers, Three structural factors have been added in favor of the prolonged inflation scenario.

first Divorce project between the United States and China, i.e. industrial relocation to countries that are geopolitically aligned, friends, or similar to the West. Even if the divorce is partial (as it is realistic), it will likely lead to increased production costs.

The second inflationary factor immigration borders, This improves the bargaining power of workers in rich countries and thus helps raise wages.

And the third is Climate Change Energy Policieswhich is also generally inflationary because coal is the cheapest source of energy, and all alternatives for one reason or another have higher costs.

Sep 3, 2022, 09:07 AM – change Sep 3, 2022 | 09:07