Karen Maley’s Business Spectator piece this week “Fuel for an inflationary hellfire” is striking if not for the main point of the article, that the massive money printing exercise being undertaken in the US and Europe (the developed world monetary base is almost three times higher than it was at the start of 2008) is “stoking the fires for an even larger financial bonfire”, but for the excellent analogy between central banking and forest management used by John Taylor, chief investment officer of FX Concepts, the world’s largest currency hedge fund.
According to Taylor, “all this money sloshing around is nothing but kindling. This is enough to start one hell of a large inflationary fire, but probably not until we have a deflationary panic first – which will add even more kindling to the pile.”
When that catastrophe will occur is unpredictable but “by suppressing small fires, the forests approach an unstable state where the dead wood, resulting from the natural cycle of birth and death in the wild, is piled high, ready to explode into flames if the conditions are right.”
Taylor argues that central banks in the developed world are following exactly the same approach. “The central banks and other governmental authorities have piled the money so high that bubbles are popping up everywhere.”
Inflation may not have hit food prices yet, but Taylor argues that it is certainly hitting other asset prices, which is impoverishing those who do not own these inflating assets.
The Bank of England and the US Federal Reserve electronic money presses have spat out more than $1 trillion of new notes since 2009. Cheap debt fanned the world’s financial problems in the first place. It feels like the current answer to the world’s ills is more of the same.
I don’t envy Glenn Stevens and the RBA right now. Indeed core inflation pressures appear to be growing and JP Morgan in January reported import prices rising 2.5%. Don’t bet on the next interest rate movement heading south…