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INFLATION spelled out using wooden letter tiles going up direction on white surface background.

Central bankers have a credibility problem.  Many people have commented that their primary role is one of general market psychology.  That perspective has never been clearer.  As such, central bankers often say things that seem inconsistent while maintaining plausible deniability about what they might do down the road.  When you speak in riddles, you can claim to have said almost anything after the fact.

 

This becomes obvious when considering what might be in store by the middle of next year.  Both Jay Powell and Tiff Macklem seem determined to spin a narrative that stretches credulity.  If you just stop and think, the details don’t add up.  What I don’t buy into is how everyone says the now undeniable inflation we are now experiencing will persist until the middle of 2022.  Astonishingly, it seems everyone buys into the central banks’ story of raising rates around that time.  In what alternative universe does that make any sense?

 

Why would you let inflation run at generational highs for well over a year, do nothing about it other than watch closely and tell stories about how you will do something one day and then, when inflation finally (if the bankers’ stories are to be believed) starts to ease up, THEN you do something about it? That’s sometimes called barring the door after the horse has bolted.  Why would any rational person wait for a problem to ‘solve itself’ before doing anything to solve it beforehand?  This is especially disconcerting when the situation so obviously requires immediate action.  To me, there are two plausible courses of action available today.  Either:

 

  • Inflation is truly transitory and will dissipate on its own in 2022, so if we can make it to that point, no rate hikes will be required; or
  • Inflation is not transitory and immediate action is required to prevent it from getting out of control.

 

Instead, we’re being told that the recovery is still too fragile, so hikes now would be premature. Once things pick up because supply chain disruptions have been resolved, however, rates will be hiked to stave off the inflation that naturally arises from an economy coming back to life.  I don’t believe it’ll ever come to that.  My view is that central bankers are covering their behinds.  Having manufactured bubbles in all major asset classes because of unprecedented easy money, the last thing they want is to have the blood on their hands that comes from popping those bubbles with rate hikes. My guess is that the North American economy crumbles long before we ever see even one of those hikes.  They will almost certainly never materialize.

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John DeGoey

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