Imagine not only having to deal with high regular price growth of everyday goods (inflation), but also a decreasing amount of actual money circulating the system at the same time that can pay for these goods.
It’s a simple question of supply and demand – and the answer does not look wunderbar.
For the first time during the last 150 years (and as far as I can tell in the history of the US), the amount of money in circulation is shrinking while inflation is not only positive but strong.
Normally, inflation goes hand in hand with increasing circulation and availability of money, but due to reckless “my-responsibility-ends-at-the-garden-fence” central bank policies around the world, we might be dealing with the opposite soon. In the western world, the system was first water-boarded with artificial debt-fueled liquidity, and then it was drained like a bursting dam using unprecedented interest hikes and bond dumping, killing money supply growth.
The latter is now significantly negative for the first time since the 1930s … the Great Depression era. Normally when this happens, inflation has turned negative along, leading to deflationary periods of economic recession or depression.
But since major nations around the world (e.g. Japan, China) are still happily printing currency in their mom’s garage, and because we live in a world of extremely well-connected global financial and trade networks, money tends to get around. Add on to that the high chance of European and US central banks starting to print more fiat money in the next few months or years again whenever something breaks (the current bank crisis might be the first impetus of this unraveling), we could indeed be entering a stagflation period as seen last about 50 years ago. That is economic slowdown with growing price tags – essentially a supercharged face-plant.
It really all depends on how the next couple of years pan out – will central banks let markets and the economy self-regulate, excesses be washed out, and necessary hardship to be carried without intervention, or will they continue the down-ward spiral? We seem to be stuck in a moment in time where debt is used like cocaine – if you just always sniff bigger amounts, the high will never stop. Until at some point the heart gives out.
Again, central banks are between a rock and a hard place, looking at either persistent inflation or economic hardship. In my eyes, quite frankly, that is something they should have thought before bringing us all into this mess.
