The crisis is still considered to be over, and the global economy is said to be growing at a healthy rate that is expected to exceed pre-crisis levels in the near future. However, an advance of inflation is making itself felt on not so quiet legs, which seems to be replacing the deflationary spurts of the great slump. In recent months, the inflation rate in India and China, the world’s great economic hopefuls, has exceeded the 5 percent mark, and food prices have risen by as much as 15 percent (India) and 12 percent (China). The increase in key interest rates, which are now 5 percent or more above the European and U.S. rates in each case, has had little effect so far. A similar pick-up in inflation can be observed in many peripheral regions of the world. In the euro zone, too, inflation reached 2.4 percent in January, breaking out of the official target range. The same development in the USA, of course, only elicits a shrug of the shoulders there.
What would have been considered alarming not so long ago, at least in the EU, is now being talked down here as well. Both ECB President Trichet and Deutsche Bank CEO Ackermann have declared the global price increases to be a “normal” phenomenon in the economic boom, which will recede by itself with the cycle. In doing so, they succumb to an elementary confusion. A mere cyclical general price increase, which arises from a surge in regular demand due to increased profits and wages from real capital valorization, is a pure market phenomenon and has nothing to do with the value of money. It is quite different when government consumption and central bank money artificially fuel the economy. There is a huge difference between whether demand increases because the economy picks up on its own, and whether the economy picks up because capitalist irregular demand is created by government decree. In the latter case, the general price increase is based on a devaluation of money itself. This is the real inflation, and this is what we are dealing with now.
In fact, the states and their central banks have created credit money on a historically unprecedented scale to absorb the world economic crisis. In the U.S. alone, more than four trillion dollars were injected into the economy through various channels within two years. Everywhere, low or zero interest rate policies are spewing money like a fountain into the commercial banking system, which is allowed to deposit bad debt as “collateral.” Moreover, the U.S. Federal Reserve has been buying its own government bonds en masse for some time, because the Asians are increasingly spurning these bonds, which have become dubious. The ECB is playing the same game with the government bonds of deficit countries in the euro zone in order to save the common currency. Contrary to its announcements, it has not succeeded in siphoning off this liquidity through refinancing operations. As long as the flood of money is merely used to reschedule debts or drive up stock market prices, inflation will be kept in check. But to the extent that the purpose of the exercise is achieved, namely to create demand out of nothing, accelerated demonetization inevitably follows. It shows ignorance to deny this connection and to fantasize about a self-sustaining boom. The inflationary bomb will dissolve the illusory growth into thin air just as the deflationary one did before.
Originally published in Neues Deutschland on 02/07/2011