You do not need to be an expert economist to know that over the past two decades, the central banks have been wrong and that those errors were eventually going to hurt the ordinary people.
Since 1950s, the interest rates vacillated. Sometimes higher, sometimes lower. Then the financial crisis hit in 2008. With the economy on the brink of collapse, the central banks lowered rates to 0% or even lower. No problem with that because huge problems call for drastic measures!
But the central banks kept rates at zero or even negative for years despite a recovering economy.
Finally central banks started lifting rates toward the end of the last decade but then the economy shut down because of the COVID-19 pandemic, so the international central bankers lowered rates back to zero again, probably another appropriate response.
But what was not appropriate was that rates were left at zero for so long, as the economy was roaring back to life again.
You do not have to be an expert to know that the combination of rock-bottom interest rates, a recovering economy and never-ending stimulus checks, paired with supply chain issues result in galloping inflation. This is what you learn in basic economic classes about supply and demand and interest theory.
And our top money experts, the central bankers who have the duty to look after our money didn’t realize that this fatal combination was going to push demand for goods and services through the roof? Add in supply chain issues, and we were looking at a can’t-miss recipe for high inflation!
Now all central banks all over the world are playing catch-up and will have to lift rates faster and steeper. We can call this shock therapy!
Unfortunately, these errors have real ramifications that affect people every day. When inflation is this high, people struggle to feed their families or fill up the tank to go to work. It will further cause a world-wide imbalance because the poorest get hit hardest.
Now, when the banks raise rates in a hurried manner to keep inflation from getting totally out of control it will slam the brakes on the economy. Or won’t they see this coming either?
It’s really difficult to understand how the “smart money people” at the central banks have been mismanaging an obvious situation so badly for so long. They really screwed up big times to the cost of the ordinary people.
Let’s see what is coming next. Business as usual or shock therapy. Either way, it will be an unpleasant cure.
Sven Franssen