EC Inflation, Money, And Supply Bottlenecks

The constant refinancing of debt from zombie companies also leads to the perpetuation of overcapacity, because a key process for economic progress, such as creative destruction, is eliminated or limited. Low interest rates and high liquidity have perpetuated or increased global installed excess capacity in aluminium, iron ore, oil, natural gas, soybeans, and many other commodities.

Why does inflation rise if overcapacity is perpetuated and there is enough transport capacity? We have forgotten the most important factor, the monetary one, or some central banks want to make us forget it. “Inflation is always and everywhere a monetary phenomenon,” explained Milton Friedman many decades ago. More supply of money directed towards scarce assets, be it real estate or raw materials. The purchasing power of money goes down.

Why did they tell us that there was “no inflation” before COVID-19 if money supply increased also massively? The big difference between 2020 and the past years is that previously, the Federal Reserve or the ECB increased money supply at or below the levels of demand for money (measured as demand for credit and use of currency).

For example, the increase in the money supply of the United States was close to 6% with a global demand for dollars that grew between 7% and 9%. In fact, the world maintains a dollar shortage of about $ 17 trillion, according to Luke Gromen of Forest for the Trees. This keeps the dollar or euro relatively stable and a perception that inflation is low.

However, there were red flags before COVID-19. There were protests all over the world, including Europe, against the rising cost of living. The world’s reserve currencies export inflation to other countries.

What happened in 2020? For the first time in decades, the Federal Reserve, and the main central banks increased money supply well above demand. The response to the forced shutdown of activity with massive money printing generated an unprecedented inflationary wave. The economy did not collapse due to lack of liquidity or a credit crunch.

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