Why do Central Banks want higher inflation?
The debt ceiling debate in U.S. Congress and related political nonsense brings even more to light the exponential growth in US federal government debt. US government debt has doubled in the 10 years since the last major debacle Congress created over raising the debt ceiling back 2011. The debate and Congress’s unwillingness to increase the limit back in August 2011 resulted in declining equity markets. It also resulted in Standard and Poor’s downgrading U.S. debt to AA+ from AAA!
The Political Standoff
The political standoff over raising this arbitrary restriction of how much debt the US can issue has become just another political lever in the dysfunctional Congress. As Secretary Yellen points out…
Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars. Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance, and in this case, 97% of that balance was incurred by past congresses and presidential administrations. Even if the Biden administration hadn’t authorized any spending, we would still need to address the debt ceiling now. Raising the debt limit was a regular occurrence – congress has either permanently or temporarily raised the debt limit 80 times since 1960. And before 2011, this was done generally with little debate as raising the debt ceiling does not approve new or additional spending but allows the government to borrow in order to pay already approved spending.
That’s right it doesn’t authorize new spending it only allows for the U.S. Treasury to borrow enough to carry out the mandates of Congress for spending that has already been authorised. At least for now Congress approved enough of an increase to keep the U.S. government solvent until December 3.
Borrowing Through The Good Times & Through Bad
The chart below shows the debt ceiling limit (red bar) and the Total debt issued (yellow bar). The debt issued line runs right with the debt limit bar. Both have seen exponential growth, approximately doubling every 10 years over the last 40 years.
Going back to Keynesian principles governments should borrow and increase spending during times of economic downturns (recessions) to help stabilize their economies. Then when the economy recovers the government can pay down the debt through increased revenues and less economic stabilizers – such as unemployment insurance, turning the deficit into a surplus. However, in recent times governments have increased debt levels in recessions and proceed to continue spending more than their revenues when the economy recovers. This leads to exponentially growing debt levels. As the chart below shows higher debt to GDP levels as debt grows faster than GDP. As the chart below shows – U.S. government debt has grown from 40% of GDP to over 125% of GDP.
And here in one chart is why Central Banks want higher inflation!
After all the economist Milton Friedman did say…
“Inflation is a monetary phenomenon. It is made by or stopped by the Central Bank”.
It is challenging to read any newspaper, social media feed, or participate in a discussion forum without the topic of inflation coming up these days.
And the extra money printed by central banks around the world for the last 40 years, which has also grown exponentially for the last 15 years is now creating that inflation. A country’s nominal GDP growth is a combination of real growth, meaning how much an economy increases output and then inflation added on top. On the chart below of US debt as a percent of GDP; we have added brackets of the average CPI (Consumer Price Inflation) rate for each of the changes in trend. Starting with the period of 1965 to 1980 CPI averaged 6.9% but has declined to average only 1.7% since 2010. Bottom line is that all else being equal, higher inflation will help reduce the massive government debt levels.
We leave you with a quote on inflation:
When a business or an individual spends more than it makes, it goes bankrupt. When a government does it, it sends you the bill. And when government does it for 40 years, the bill comes in two ways: higher taxes and inflation. Make no mistake about it, inflation is a tax and not by accident.
Ronald Reagan – 40th President of the United States
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Gold had a nice move up last week to just below its 200 day moving average. Gold has continued to consolidate just below $1790 this morning on the back of the weaker USD this week. However, bond yields continue to move higher with the 10 Year Treasury now at highs not seen since May, which is limiting Gold’s move higher from here.
Federal Reserve Gov Christopher Waller yesterday said that the central bank should next month begin tapering its monthly purchases of $120 billion in Treasury’s and mortgage related assets, which were launched at the start of the pandemic but are now viewed as no longer needed.
We are not long now to finding out how this will play out and more importantly how the market will react to any form of tapering. The November Fed meet is to be held on the 2-3 November.
GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
20-10-2021 1778.15 1778.00 1291.29 1289.760 1529.740 1526.770
19-10-2021 1779.40 1779.55 1289.89 1288.220 1526.900 1526.680
18-10-2021 1762.45 1767.85 1283.94 1287.350 1522.050 1523.710
15-10-2021 1781.45 1772.65 1297.96 1288.540 1535.430 1528.560
14-10-2021 1797.15 1798.70 1309.76 1312.510 1546.810 1551.200
13-10-2021 1767.45 1785.70 1296.78 1309.630 1529.550 1543.920
12-10-2021 1759.10 1767.75 1292.41 1301.770 1521.800 1532.460
11-10-2021 1752.55 1757.65 1286.72 1288.180 1516.480 1518.260
08-10-2021 1757.50 1773.25 1291.41 1300.500 1520.410 1533.330
07-10-2021 1758.55 1762.10 1294.12 1294.440 1521.500 1521.040
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