Finance Monthly - May 2022

phenomenon”, blaming excessive government debt and monetary creation for the current inflationary woe and sense of crisis. They point to the massive monetary creation since 2012 – when we began QE – and ultra-low interest rates as the drivers of inflation. Until recently, however, we didn’t see any realworld inflation… all the inflation generated by QE was locked up in financial assets, driving bond and equity rallies. Inflation started to spiral from financial assets into the real world during the pandemic. Suddenly real events – like the container ship, the Evergiven, blocking the Suez Canal highlighted supply chain crises. Today we have Walmart paying truck drivers $100k salaries to ensure supplies – triggering wage inflation across the retail sector. Consequences beget consequences. The “Monetary Experimentation” we’ve seen since the global financial crisis of 2007-2008 in the form of sustained criminally lowinterest rates and Quantitative Easing did little to boost growth, but it created extreme financial asset inflation - driving inflation into the bond and equity bullmarkets of the last 12 years. Now that inflation is transferring into the real economy, going back to simple monetary tenets: if the money supply rises, inflation follows. All you need to do is light the blue touch paper to trigger an inflationary explosion. What is now driving inflation is the massive amount of liquidity created by low rates and QE. It’s now fuelling the fires of massive real economic commodity and energy inflation. It proves excessive liquidity creates non-monetary real-world inflationary risks. And all it took was a trigger. Ukraine and Energy Insecurity. Suddenly Europe woke up to the frightening reality of dependency on Russia for power. And, as the world woke up to the reality that Russia and Ukraine are dominant agricultural suppliers… ouch. Nothing makes you so aware of reality as a sharp punch in the face. It opens our eyes to finally see the blindingly obvious financial connections hidden in the complexity of the Global financial ecosystem! Commodities, Food, and Energy – the building blocks of everything in the global economy – have become as much distorted by the last 12 years of monetary experimentation as every other kind of asset…. Here’s just part of the problem… As soon as you spot a no-see-um, its effects become very real. As soon as you realise a “someone else’s problem” is also yours, the consequences magnify and become reinforcing. That’s why the moment you spot a crisis is when it gets more dangerous. That moment has occurred. When market commentators start to compare what is happening today to 2008 – pay close attention. There are parallels – but that one was about a financial collapse. This one is about a real economic crisis. Abundant liquidity distorts not just rates, but the real economy also. As the prices of labour, shipping, and logistics change due to inflation you need to understand the whys and hows to anticipate their effects. Wages will rise because that’s how wage inflation rises. Logistics will get more expensive because fuel costs have risen. Food prices will rise because fertiliser costs are up and supply is limited. Real-world consequences… trigger further consequences. The current risks are immense. If central banks get it wrong – and they usually do; policy mistakes cause most recessions - then removing the easy liquidity which has driven the commodities market could trigger a real-world economic crash. Here’s just part of the problem… As soon as you spot a no-see-um, its effects become very real. Finance Monthly. Bus i ne s s & Economy 25

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