Central Banks: Rapid Asset Inflation is Destroying Purchasing Power

Inflation should be caused by normal market responses. However, when the government keeps asset prices artificially high, the result is an inevitable rise in assets prices while purchasing power self-destructs. How does this happen?

When central banks purchase stocks and bonds and turn into investors, interest rates are kept low, and borrowing becomes easier. Money becomes cheap as the central banks keep throwing piles at commercial banks, who then lend it out to consumers. This artificial stimulation of the economy and excess liquidity inflates the value of assets in ways that can’t be sustained without continuously feeding the asset bubble with more money. Eventually, the central banks printing press will need to slow down and stop flooding the market with devalued money. When that happens, the asset bubble is likely to burst, and we could be facing an economy on the verge of a recession.

The US dollar is the most influential currency in the world. Excess US dollars have held up global financial imbalances during times of crisis. If the dollar collapses, so does the global economy. East Asian and Middle Eastern countries are holding massive dollar reserves. If they ever decide to recklessly sell U.S debt, chaos will be the likely result.

The current global financial situation is spinning on hopes and artificial central bank intervention. When reality hits, the global asset bubble burst could get ugly.

Rising prices are directly linked to the influx of money. See the chart below:

The Federal Reserve kept interest rates low while continuing to expand its money supply. All this money caused a rise in consumer spending and increased debt, while unemployment is being kept low, even though there are numerous amounts of people “out of the workforce.” Like a hamster spinning in its cage, the Federal Reserve must keep spinning out the influx of money faster and faster to maintain the illusion of an economic boom. Academics are anticipating multiple interest rate rises in 2018, and a credit slowdown could put an end to the central banks’ wall street party. If that happens, the hangover could be painful. 

Consumers do not perceive inflation as a problem, either – yet. Most of them do not realize the highly inflated prices of their assets. The realization that consumers are getting less for their money is not fully understood by many. If consumers’ expectation of inflation remains low, the central banks can continue their money-printing games.

It is almost certain that the asset inflation boom will turn into a bust. Central banks will fight against the bust by creating even more money, thereby deflating currency value and inflating asset values further. Consumers will continue to lose purchasing power as these “intellectuals” print to the moon.

Housing costs, healthcare, and the cost of higher education are being underreported by slight-of-hand reporting means when calculating the Consumer Price Index. The cost of healthcare makes up 18 percent of the Gross Domestic Product, yet it is listed as only 8.5 percent of the CPI.

 

Actual estimates of real-world inflation could be as high as 10 percent annually instead of the official reported rate of 2 percent. The government is heavily underreporting inflation while the Federal Reserve would like to raise inflation rates. But neither party is advocating reporting the actual rate of inflation. The Federal Reserve wants easier credit to hike wages in conjunction with inflation, which allows consumers to pay down debts and acquire new loans to pay off. Banks, of course, are happy to provide new loans and collect the monthly interest.

However, when wages don’t keep pace with inflation, the cost of mortgages, property taxes, healthcare, and education become harder to meet for 90 percent of consumers. It’s the remaining 10 percent that benefits from current monetary mismanagement.

With governments and central banks artificially keeping inflation low and the value of assets high, it is likely that when the asset bubble bursts, it will be a very loud pop heard by disgusted Zerohedge & Gold Telegraph readers everywhere…

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