Who is to blame for the high inflation in the world?
The current rise in U.S. consumer prices is blamed on the war in Ukraine by President Biden.
The Chairman of the Federal Reserve says that high inflation is a result of supply chain issues brought about by the Pandemic, the war in Ukraine, and the strong labor market.
Edward Chancellor, a financial historian, journalist, and investment strategist, believes central bankers are to blame. He thinks that central banks have created an "everything bubble" that has left the global economy with an inflation "hangover".
Chancellor talked about his theory in a recent interview with Mark Dittli of The Market.
He believes that speculative bubbles are formed around the invention of a new technology. The tech aspects and the psychological aspects of bubbles are not included in my book. People are driven into speculative endeavors and chase returns when interest rates are pushed down.
We have to go back in time to understand Chancellor's argument. After 2008, inflation in most developed nations was low, and central banks around the world were more concerned with ensuring a global economic recovery.
In order to keep interest rates low, some central banks, like the U.S. Federal Reserve and the Bank of Japan, instituted a controversial policy called quantitative easing.
The money created by the Fed never fed through to the real economy, leading central bankers to ignore inflation.
It wasn't the same when the COVID-19 Pandemic hit. The world's central banks slashed interest rates and printed billions of dollars. Money was used to finance the same amount of government spending, which contributed to the largest peacetime deficits in history.
On top of that, near-zero interest rates and excess liquidity in the financial system encouraged investors to buy risky assets, creating an "everything bubble" as evidenced by the rise of tech stocks, cryptocurrencies, meme stocks, and even collectibles like baseball cards in 2020.
The Chancellor said, "We now have rising and unstable inflation." We are waking up to a big problem.
Chancellor argues that central bankers believed they could keep interest rates low without causing consumer prices to go up.
Why wasn't it high? Their monetary policies have sound ones. It was referred back to them. He said that when inflation goes out of control, it has to do with supply chains or China.
The Chancellor argued that the actions of the central banks have helped speculative trading. He said that the monetary policy won't work in the future.
Maybe we will all be grown up in the future. We need to understand economics and finance better. He said that we can live in a world where finance is mostly used for allocating capital for productive purposes.
The Chancellor believes that capitalism could be at risk if central banks return to their old ways.
Over the past 12 years, we've seen a world in which central planning of economic and political life has become a reality. I would say that capitalism wouldn't survive if we went down that route.
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