A major challenge of our time

A major challenge of our time

April 21, 2019 0 By Michel Santi

Where has inflation gone? While the US enjoys one of its longest periods of economic expansion, and while it is pretty much at full employment with its best figures for fifty years, inflation is nevertheless miniscule. Will it one day make its return to our developed nations of integrated economies?

This is why Donald Trump can criticise his central bank because the absence of inflation gives him cause to say “if the Fed had done its job properly, the stock markets would be 5,000 points higher at 10,000 and GDP would be over 4%, rather than 3%. In fact, central banks are now being criticised as much from the right as they are from the left for not acting more decisively to restore growth, now that the inflationary threats have dropped off the radar. Having fought the spectre of deflation for decades, and having even caused recessions by using their ammunitions sometimes indiscriminately to achieve their goals, they have now been disarmed because the billions and trillions created to combat the crisis and deflation since 2007 have had barely any effect on the rise of prices and wages. All the fuel used wasn’t enough to jump start the rocket ship, and they are now no longer able to set interest rates lower than the rate of inflation to recover credit, investment and the economy for the simple reason that their rates are at zero!

It is therefore the whole profession that central bankers belong to that is being challenged: not just for having failed to revive economies, but also – and maybe especially – because this moribund deflation means they are no longer indispensable… Are they thus condemned to losing their independence, that had been won over the course of many years by putting their necks on the line, and to align and synchronise with the political executives, who control taxation and public spending,in order to repair the whole machine? Trump – who supports outsiders as candidates for the Board of the Federal Reserve that he hasn’t stopped criticising for several months for not stepping up their growth recovery game – is therefore maybe a visionary? In any event, the increase in US federal spending and public investments are de facto a totally valid road to go down to resuscitate inflation, while elsewhere the Germans and Dutch have still understood nothing of the macroeconomic mechanisms at play, they who lavish themselves with praise for having next to no debt when it is precisely the aforementioned stance that would allow them to spend more and thus contribute effectively to restarting the rocket ship.

In other words, there will be no return for inflation without political will. And this is double-edged – allow me to explain: if we disregard the dogmatism of the Northern European busy bees and their morbid obsession with chalking up more surpluses, it is possible to assert that inflation has disappeared, crushed beneath the combined weight of globalisation and robotisation that have joined forces against workers to suppress their room to negotiate and to keep their wages down. It’s therefore not the central banks but indeed capitalism that’s killed inflation.