Economic History Foretells Our Financial Future

In political discussion, “Inflationism” opposes hard money principles, which in turn argues that a currency’s actual worth should be
preserved through tangible means. The notion is most commonly associated with, and an accusation made against, various schools of economic thought that call for government intervention - either fiscally or monetarily, to attain full employment, says
Cheryl Jones.


The famous economist - John Maynard Keynes - once summarised the consequences of inflationism as follows: “Governments may secretly and unobserved- take a significant portion of their populations’ wealth through a continuous process of inflation. They not only confiscate, but they do it arbitrarily; thus, although the process impoverishes many, it really enriches a few. The sight of this arbitrary reorganisation of wealth undermines not only security, but also faith in the justice of the present wealth distribution.”


Under the gold standard through which nearly all countries fixed the value of their currencies in terms of a specified amount of gold - or linked their national currency to the foreign currency of such a mechanism, the use of physical gold as representation of a currency’s value, enabled the convertibility of the currency (backed by government promise) back into gold at a fixed price - allowing for stability. In order to disregard the implications of the business cycle, which stipulates that the cyclical behaviour of an economy from expansion to recession are the natural ‘ebb and flow’ of a free market place- the gold standard was abolished after World-War II.


Since then, the Post-Keynesian economic concept of Neo-Chartalism, which favours government deficit spending to achieve full employment and has always been criticised as inflationary, has dominated the public discourse, despite historical evidence that such deficit spending will eventually lead to hyperinflation in the long run.

Unlike Keynesian economics, the Austrian economic school of thought advocates that an increase in the money supply that is unaccompanied by an increase in the production of goods and services, eventually leads to an increase in inflation. The misallocation of capital, which occurred when 

government intervened to keep interest rates artificially low or high, eventually causes economic recessions, having already postponed the inevitable business cycles of ‘boom and bust’ by kicking the proverbial can down the road.


When the Federal Reserve acquires a bond, mortgage-backed security, or other asset as part of the process of quantitative easing, it is essentially injecting cash into the economy, and the dollar’s value should fall as a result of the increased supply. Although ‘sterilisation’ simply implies that the Fed is not extending its balance sheet (or producing money) when it purchases assets through quantitative easing - since it is absorbing money from elsewhere in the system, it is assumed the Central banks will be operating in the markets and sterilise any such procedure by removing that cash injection from the system. Policy wise, this can be accomplished through three methods:

1. Term deposit: The first—and most common method of ‘sterilisation’ is to pay commercial banks interest on deposits made at its deposit facilities.

2. Reverse Repurchasing Agreements: Another less utilised avenue for the Fed to sterilise asset purchases, is through reverse repos.

3. Interest Rate Hike: The Fed may raise reserve/interest rates, requiring banks to keep a larger proportion of their funds at its deposit facility.


Prior to the 2008 financial crisis, the Fed’s balance sheet was approximately $800 billion. However, the Fed’s balance sheet has proceeded since this time to exceed $7 trillion by mid-2020, with most of the assets being held mostly in the form of securities and U.S. Treasury bonds in particular.

With the US Fed currently holding just under $9 trillion in assets as of mid-January 2022 after having more than quadrupled the amount it had from early-2020 and reduced long-term borrowing costs for businesses and individuals facing financial difficulty, the Fed’s dual mandate which compels it to maintain both price stability and maximum employment, pushed modern economic monetary policy to the extreme, but to no avail.

The 2007-2008 financial crisis, on the other hand, proved that even reducing interest rates to zero was deemed insufficient to support collapsing economies, and the Fed resorted to more unorthodox measures.

When the Fed began to wind down its asset purchase programme in 2013, it provoked a so-called ‘taper tantrum’, an event where investors panicked and set off a selling-spree in bonds, followed by a rise in Treasury rates. As a result, Asian developing markets saw significant capital outflows and currency devaluation, pushing regional central banks to raise their respective interest rates in order to defend domestic capital accounts. With the US Fed now forever at work to prop-up plunging equity markets across the globe, the potential risks of the combined cross-party US Economic Stimulus rescue bill, and the Fed’s biggest-ever financial bazooka, have seen the US Dollar under pressure as the world’s reserve currency.

Obama Administration - 20 January 2009 – 20 January 2017 - The Federal Reserve’s balance sheet contained around $4.5 trillion of debt. After taxpayers had dealt with the pressing matter of bailing out banks, insurers, and automakers, the central bank undertook much of the heavy lifting over two presidential terms, and under Chairman Ben Bernanke underwent QE1, QE2, QE3 and ‘Taper-tantrum’ measures.

Trump Administration - 20 January 2017 - 20 January 2021 - The Fed pushed over $1 trillion into the economy through the first quarter of 2020, with Fed Chair Jerome Powell pledging never-before-seen amounts of money printing and so-called ‘quantitative easing to infinity’ through an endless bond-buying programme.

Biden Administration - 20 January 2021 - To Present - Federal Reserve Chairman Jerome Powell’s plan has received praise from Joe Biden as he moves towards tighter monetary policy, winding down the Fed’s easy-money measures that were used to protect the economy following the global health event. Fed policymakers have indicated that interest rates would be raised multiple times this year, most likely beginning in March 2022 in an effort to contain inflation, which is increasing at its highest rate in over 40 years.


The notion that ‘Human Freedom Rests On Gold Redeemable Money’, speaks far greater volumes than in the days of the late U.S. Congressman Howard Buffett’s prescient paper, touting the realisation that in spite of the gold standard largely being abandoned due to its perceived price volatility, the scarcity of the precious metal was a limiting factor to exuberant government expenditure via the printing-press (QE), or easy money printing of fiat-currencies by acting as an ‘internal restrictive mechanism’ on inflation overwatch.

The move-away from the traditional gold standard was based on the perceived volatility of the precious metal, as well as the limits gold reserves place on government finances in terms of not being able to artificially maintain fixed exchange/interest rates, participating in expansionary measures or reducing unemployment during economic downturns through the use of ‘shovel ready’ jobs.

Although the independence of central banks was once held sacred, Margaret Thatcher, former Prime Minister of the United Kingdom, was deeply concerned about an autonomous European Central Bank that would “be accountable to no one, least of all national parliament.” It has become a contentious point against recently adopted technocratic measures, as the element of responsibility and accountability on how to combat inflation or a recession, is removed from nations that are impacted by Central Bank decisions.


Another common objection in Europe is that quantitative easing causes more moral hazard for governments than the problems solved in the long-run. Market discipline in the form of rising interest rates in particular, can be utilised to compel governments to reconsider increasing deficit expenditure with ‘Shovel-ready jobs’. However, this is not the case when a central bank operates as a bond buyer of last-resort and is willing to acquire government assets indefinitely (i.e. QE infinity), rendering the concept of market discipline ineffective under the distorted investing conditions that we now find ourselves in.

Between 1921 and 1923, the German Papiermark, the currency of the Weimar Republic, experienced hyperinflation- most notably in 1923. It resulted in significant internal political instability in the country, the occupation of the Ruhr by France and Belgium, and overall suffering for inhabitants of the country.

100 years later, the world’s largest economy - now following in the footsteps of the Ancient Greeks, Romans and other civilisations that printed money until civilisational collapse - finds itself caught between a rock and a hard place having nurtured dependence on the US Fed for artificial life support, and therefore created a negative feedback loop with ever finite possibility of lifting interest rates from the zero-bound (0.25% interest rate) without ushering in the inevitable delayed economic recession that was kicked down the proverbial road since market manipulations began back in 2008. Prudent investors must consider all methods available to hedge against hyper monetary inflation.   EG