Monetary Policy

Monetary Policy: Stop Easy Money

There is an interesting article from the think tank Fondapol entitled, “Politique monĂ©taire : il faut cesser l’argent facile” (Monetary policy: stop easy money), written by Jean-Baptiste Wautier, which confirms what we say and brings several notable elements. Let’s review it.

Inflation and Monetary Policy

Inflation comes first and foremost from money printing, from “the catastrophic effect of Quantitative Easing”, the author rightly points out. It is not Putin’s fault. Governments are trying to offload. But it is they and their budget deficits that are at the root of this evil. Unfortunately, inflation is here to stay. Once it has spread through the system, it takes a long time to subside.

Monetary Policy: The Role of Central Banks

Especially since central banks are constantly lagging behind reality, either because they are unable to really understand what is going on, or because they want to falsely reassure economic actors and hope that they will lower their expectations of price increases. To beat inflation, interest rates must still rise, as current levels remain insufficient.

The Impact on Consumers

The decline in purchasing power is therefore not over. The United Kingdom provides a clear and painful example, because the “automatic stabilizers” and social assistance are weak compared to France. In addition, the effect of inflation and the resulting loss of purchasing power vary greatly depending on the income scale.

The Situation in the United States

In the United States, consumption has not yet fallen, but only because “the savings and over-savings made during Covid are melting away like snow in the sun”. And when that is no longer enough, households take out consumer credit, which is exploding at the moment. The situation remains difficult, however: 40% of US small businesses said they could no longer pay their rent.

Real Estate Sector and Interest Rates

As an inevitable consequence, the real estate sector will enter a period of depression. The situation differs between countries. Households are indebted at a fixed rate, such as France. Or those where they are indebted at a variable rate. In the latter case, the reaction is very rapid. As can be seen in Sweden, for example. There was a 15% contraction in property prices in 8 months. This represents the worst slump since the early 1990s.

Risk of a “Great Depression”

In conclusion, the author warns of the risk of a “great depression” which would add to an already deteriorated economic situation. A great depression that would be added to all the factors of disintegration of our societies (regression of democratic models, loss of confidence) would be particularly dangerous. It is urgent to stop pouring out easy money, multiplying small checks, cobbling together ‘shields’, etc.

Inflation and Energy Transition

However, inflation also comes from the energy transition (wind turbines, regulations such as the DPE, the end of the combustion engine in 2035, etc.), which is extremely costly and is causing the cost of energy and many goods to explode.

Can We Avoid a General Explosion?

Is a rise in interest rates to the point of positive real interest rates even possible? There is too much public and private debt, much more than in 1980 when Paul Volcker raised the Fed’s key rate to 20%. Is there not a risk of a general explosion?

Final Thoughts

In any case, we agree that inflation will persist. Central banks are slow to react and the current level of interest rates will not be enough to stop the rise in prices. A “great depression” is looming, and urgent action is needed to avoid it.

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