The Funny Joke of Central Banks: If Inflation Comes Back, We'll Be Raising Interest Rates

Even the central banks are looking at the return of inflation, that's who should alert all savers and investors around the world. As a reminder, central banks were created in the 19th and early 20th centuries (for the Fed) in order to guarantee the value of the currency, i.e. to combat against price gouging. Following the disconnection of the dollar and gold, decided by Richard Nixon on August 15, 1971, and the double-digit inflation that followed, central bank independence has been strengthened, at least formally (as we remember when the European Central Bank was created).

And inflation was defeated. The growth of the 1980s and 1990s in the countries of the OECD has been accompanied by a marked moderation in prices. Everything changes in 2000: after the Nasdaq crash of April 2000 and the September 11, 2001 attacks, the central bank of the United States does not want a recession (which would be interpreted as a victory for terrorism) and then decides to lower its key interest rate. Credit, especially in real estate, is soaring, and we know what happens next: the 2008 crisis, the sovereign debt crisis in Europe in 2011, printing press, zero rate, etc. But no price slippage (for consumption, but real estate is rising).

With the coronavirus recession and slow, erratic deconfinement, central banks are revving up their printing presses like never before, and this time concern about widespread price slippage is spreading. But, confident of their forces, they immediately reply, "Don't worry, we have the situation under control!"

Thus, Fed Chairman Jerome Powell said on August 27th that inflation could now remain above the 2.0% target "for some period of time" before the institution has to act by raising interest rates to contain it. Well, it's not complicated: If inflation returns, we raise interest rates and everything will calm down and come back like before. Curtain!

What a joke! What a preposterous statement! The mountain of debt, public and private, makes central bank policy irreversible. Rising interest rates would stifle debtors. Governments secretly welcome that their debt will never be repaid, either, but there's still even something to pay every year: the interest on that debt, the "debt burden", which is recorded as such in the budget. With the decline in rates, at zero and even in negative territory, this burden has decreased in recent years, despite the rise in the stock. It's an ideal situation, push-to-crime. With a rise in rates, the negative effect is twofold (increase in the charge + increase in stock), as the deficit continues. The budget deficit even becomes uncontrollable because the debt burden is becoming as much a burden as the item of expenditure in terms of value, with a strong dynamic, which makes any return to balance impossible. The rise in rates will also lead to the bankruptcy of the zombie companies kept alive by debt, the collapse of the leveraged structures (LBO-type), the explosion of the delinquency rate on real estate loans, students loans, consumer loans... a 1929-type crisis. The central banks will have no choice but to speed up their printing presses, and after inflation will come hyperinflation.

Does Jerome Powell believe in what he's saying? The question doesn't matter, his statement has no verisimilitude, it's a joke. We must not believe central banks, you have to bet against them with real assets, that is to say, things that do not depend on currency. Each one will be determined according to his assets and risk appetite, but in any case, physical gold is one of them.