Will Central Banks Cause Stagflation, Something Bitcoiners Have Long Warned Against?

A man stares at the screen that shows the shares index of a securities firm in China's southwest... [+] City of Chengdu in Sichuan province on March 11, 2008. Chinese share prices dropped 0.67 percent in morning trading amid worries about further measures to cool the economy following data showing record-high monthly inflation. AFP PHOTO/LIU Jun (Photo credit should be read LIU JIN/AFP via Getty Images).AFP via Getty Images

Inflation has become a major media phenomenon in recent years due to a sudden increase in inflation in developed countries around the globe. The evening news now focuses on obscure concepts such as the Phillips Curve and demand-push inflation. This has become a major political and geopolitical issue. European elites blame Ukraine's war for rising energy prices. The American electorate sees inflation as their most pressing concern. This time of reckoning is for those who believe that supply-side and money supply problems will cause problems (i.e. bitcoin supporters). But inflation might not be the end of the world. Stagflation can be defined as a combination of economic recession and inflation. It is a rare phenomenon due to the way central banks view inflation. Inflation and economic growth, according to the demand-push theory, are mutually exclusive. Inflation can be caused by economic growth. This is because wages are distributed at a higher level among workers, which means that money will chase down more and more rare goods. As goods become more expensive relative to the money supply, this causes an increase in inflation. Modern economies are complicated and interconnected with each other, so there are many factors that can cause inflation to rise or fall. A rise in energy prices due to supply-side restrictions on energy imports seems to be what is driving European inflation. However, North American inflation is "abating" at levels that are higher than those central banks would normally tolerate. However, it does not seem that inflation is caused by a hot economy. Quantitative tightening and rate increases it triggers are likely to slow down economic growth. There are some worrying signs that stagflation could rise again, just as it did during the 1970s.

1- Europe is in an energy crisis. This is a repeat of 1970's stagflation cycle.

In the 1970s, stagflation was caused by oil price shocks. These same conditions are being repeated in Europe. Prices are rising for everyone, from consumers to businesses. This has led to the closure of industries and inability of countries like Germany manufacture at scale. It is causing an economic slowdown, while prices are out of control for all European Union energy users. The European Central Bank is able to control the Euro supply, but has chosen to ignore the money supply to inject the European people with financial opium. This means that they are content with rising asset and real estate prices to avoid political chaos. The European Central Bank can't control energy prices in a significant manner (or to put it another way, the ECB cannot 'print' the scarce energy reserves Europe imports). With the energy price shock, there are increasing risks of a recession and inflation. The Phillips Curve is interesting in its short-term, medium term and long-term implications. The relationship between inflation, unemployment and other variables has been inversed. This is the Phillips Curve that most central banks use and the tradeoff they make.

Normally, inflation will fall if there is more money in circulation. This simplistic interpretation of the problem central banks face is to keep inflation within a manageable range (usually around 2.2% per annum, as they define it) and boost employment.

However, in the long-term, increasing the money supply to stimulate an economy can have unintended consequences, including the creation stagflation. This does not take into account the extreme responses of central banks after COVID-19 or the 2008 financial crisis.

A decade of negative and near-zero interest rate targeting has resulted in large asset inequalities which have led to dangerous asset bubbles around the globe. Unconventional monetary policy has also been used to support artificially high government debt yields. This includes the ECB buying sovereign debt in order to achieve political unity and the Fed increasing the amount of collateral that it can keep on its books.

The monetarist belief that central banks shouldn't 'inject any artificial uncertainties' into the markets has been replaced by the running of the largest monetary experiment in the world on how high unemployment can go in an asset-driven economy. Fiscal policy, which was encouraged partly by interventionism within monetary markets, has grown fiercely, leading to large amounts in sovereign debt in both developed and developing countries.

This may have prevented COVID-19's complete shutdown of financial markets, but it may also have crowded out private investor and a healthy debt market. The monetary policy regime has changed dramatically, from one that rewards asset investors excessively to one that punishes them. This has been interpreted by central bankers as an exercise in consumer inflation expectations. However, stagflation has become more than a buzzword. It is a reality that is increasingly common in certain areas of the world, and possibly in a way that is universally accepted.

In an era of slow to negative economic growth and increasing inflation, situations like the one that occurred with the United Kingdom's hasty Mini-budget Political Transition could become the norm.

3. Stagflation has had devastating and historic geopolitical implications

Global disentanglement is also a reality. This is the beginning of a world that is truly divided into poles. The countries that are advancing in growth are trying their best to navigate the American-dominated finance and trade system. This has been the dominant model of late 20th century. Some countries, like the People's Republic of China are now considered political rivals. Some, like Russia, have begun warring against the existing world order.

This means that supply chain problems make stagflation easier for everyone (and in China, a zero COVID policy that is now abandoned but still has unpredictable economic consequences locally and globally and lingers in some restrictions), it is likely that any stagflation could bring about massive political change.

Remember that Nazi Germany was born from the stagflation of The Weimar Republic. That the People's Republic of China was created under the Nationalist raging inflation for its birth is a credit to that: that Japan's Taisho Democracy gave place to the Imperial Japan, which would perpetrate genocide across Asia and lead into open confrontation with the United States. Economic damage can cause massive political turmoil and unpredictable consequences. If the 2010s were this year's 1920s, the 2020s could be this cycle’s 1930. This is a grim prediction that may become our reality.