The trillions of dollars, euro, yen, Yuan etc. created by the central banks since the 2008 crisis haven’t triggered any wave of inflation, contrary to what history has been teaching thus far. But should we underestimate the risk? Of course not.
This mass of money created out of thin air by the central banks has not generated higher prices for a very simple reason: instead of being invested in the economy, it has remained idle in the banks. All of this money is “frozen” – the most part at the central banks themselves!
Let me explain: central banks print money in order to buy back sovereign and corporate bonds, thus providing governments and corporations tons of liquidity. But very little of that money finds its way into the real economy – demand is weak, stringent solvency requirements keep businesses from borrowing, opportunities do not abound, due to a weak recovery. On the other hand, banks have stopped lending to each other because after the 2008 crisis, they lost confidence in one another; so the interbank market is idling. Banks prefer parking their money where they are 100% sure to get it back – with central banks.
The central banks’ objective, with these buybacks, was to lower interest rates to make credit more accessible to businesses and consumers. Well, we do have zero or negative interest rates, but there has been no economic recovery. If interventionism worked, the USSR would have become the first world power… but the economy doesn’t work like that.
This money goes around without touching ground, so to speak, so there is no risk of inflation on the horizon. Part of it finds its way into financial markets – dangerously fuelling them – but that’s all. However, the current context could change. What could make this money reach the “real economy”? A strong economic recovery, perhaps, which would provoke a strong rise in business loans, investments, salaries and, finally, prices? Let’s stop dreaming here: the paralysis of our economies is quite severe, especially due to taxes and regulations (this is where governments should act!). Zero rates are putting the brakes on Schumpeter’s “creative destruction” by letting lame ducks continue to get financing.
