Central banks got away with round one. They deliberately engineered a vast inflationary shock in 2022.
Why? To cut the burden of dangerous national debts in Europe and the US by inflating them away.
In Greece this age-old ploy worked so well that the inflation cut around 25% off the debt to GDP ratio. It was around 16% for Portugal and 14% for Spain.
The IMF estimated that countries cut their debt-to-GDP ratio by 0.6% of GDP for every percent of inflation they experienced. A 10% jump in prices gives you a 6% cut in debt to GDP, for example.
The typical advanced economy has cut its debt to GDP ratio by over 5% thanks to the inflation of 2022 alone.
It’s not exactly mission accomplished. Debt levels are still dangerously high in many places. But it’s a good start. For them, not you and me, anyway.
The question now is, when will round two begin?
Well, I don’t know about when. But I think I’ve figured out how.
Not their first rodeo
Central banks are not supposed to print money and buy bonds to fund governments, because this creates inflation. However, central banks are very good at finding excuses to do it anyway.
The European Central Bank and Bank of Japan did it in the guise of trying to engineer a small amount of inflation for years. But they were really funding government deficits.
Then the pandemic hit and gave every central bank the perfect excuse. They had to finance their governments emergency expenditures. The ECB even called their bond buying program the Pandemic Emergency Purchase Program (PEPP).
Policies like this were the source of the flood of money that caused inflation. Central banks pretended not to notice it for as long as possible, because this allowed them to keep interest rates low — the mechanism that makes financial repression cut the national debt.
It worked, with debt to GDP levels outright falling in some countries and rising far less than they would have in others.
But the point is that the pandemic gave central bankers the cover they needed to do all this.
To recap, for the plan to work it needed three things:
- A reason for the government to spend a whopping amount of money (the pandemic)
- An excuse for the central bank to finance this expenditure despite the risks of inflation
- Turning a blind eye to the inflation that resulted by labelling it a temporary shock that doesn’t need higher interest rates
So, how will they do it next time around?
Net zero is a fiscal shock in waiting
The cost of net zero is as shocking as the attempt to hide it. Well, US Treasury Secretary and former Fed Chair Janet Yellen recently put the figure at US$3 trillion per year, globally. But estimates vary wildly. As do assumptions about who pays for what.
At some point, this cost is going to hammer governments’ fiscal projections so hard it makes current debates about tax policies look pointless. Even Australia’s government would struggle to raise enough debt to meet its net zero targets.
And this sets up the perfect opportunity for central banks to engineer the second wave of financial repression – the combination of inflation, low interest rates and capital controls which was imposed on us in 2022.
Here’s how it will go down…
Saving the planet is a good reason
to print money
At some point, the vast cost of net zero will show up on budgets and governments will get into financial trouble. The bond market will balk at the idea of having to pay for the impossible cost of net zero. It’ll refuse to fund the trillions of net zero spending and bond prices will tumble as they did in 2022.
Central banks and politicians will identify the cost of net zero as the cause of this meltdown. Indeed, that must be the cause which the public associates with the bond market crash, because it gives central banks the excuse to intervene.
Printing money and buying government bonds may be a bad idea. But doing it to save the planet from a pandemic climate change is a perfectly good idea. Who cares about the inflation? We’re trying to save the world!
Central bankers do care about inflation, of course. Because inflation devalues national debts, making them easier to repay. And that’s what really matters right now.
Do you see how the PR campaign will unfold?
Central banks are already committed to climate change. And all governments and their central banks face the fiscally impossible challenge of net zero.
It is the perfect setup for another round of inflation engineered by central banks to print their way out of dangerously high national debt.
It comes as no surprise that the charts are signalling buying opportunities in two of the assets that’ll soar if I’m right. That’s according to my old friend Murray Dawes, who taught me everything I know about analysing stock charts.
He is out with two new videos for his Closing Bell series: Copper’s Down, But Not Out as it Approaches Buy Zone and You Haven’t Missed the Boat with Gold.
The videos have been so successful that Murray is planning to take the next step. Keep an eye on your inbox Saturday.
Until next time,
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Nick Hubble,
Editor, Strategic Intelligence Australia
PS: Big Reminder! Don’t forget to tune into the big blockbuster 150th episode of Murray Dawes’ ‘Closing Bell’ this Saturday!
Murray believes a certain clutch of stocks are approaching a final ‘buy at a big discount’ opportunity.
Before they potentially approach new highs.
And he’s zeroing in on one play in particular. All will be revealed in Closing Bell #150.
Make sure you watch for the email subject line: Closing Bell #150: A Special Trade
You can set a Calendar Reminder by clicking here.
Or subscribe for free to the Closing Bell YouTube channel here.
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