By Aldo Abram, Liberto y Progreso
These national entities were inflating “bubbles” in all asset markets
INFOBAE: The market is beginning to fear a new international crisis like that of 2007-8 will repeat itself. The reality is that this likelihood exists because those who run central banks do not learn from their mistakes. The excess issuance generated since 2001, led by the Federal Reserve and accompanied by almost all the world’s monetary authorities, led to the commented debacle in the markets. What happened in that period is that all this overflow of liquidity went towards investments and “inflated” the prices of all assets (“bubbles”). Even, given the fall in the yields of the safest investments, they sought to place the silver in the riskiest ones, which allowed greater profits, also “artificially” increasing their values. Of course, there is a limit to this and, at some point, the “balloons” that “inflated” the most bursted, leading to the bursting of all the others to which the excess funds were also being directed.
In the case of the 2008 crisis, the first “bubble” to burst was the US mortgage market. In a demagogic decision, with the excuse that all Americans had access to a home, two large semi-state mortgage institutions were given more flexible conditions to buy credits granted by other lenders. Thus, the latter had to give expensive loans to those who were not sure they could pay and sell them to these two institutions, making a good difference; which attracted many resources to this type of investment. The problem appeared when the borrowers began to show difficulties in making payments and “the bubble” bursted. It soon became clear that the prices of all assets were artificially high and added to the collapse.
To moderate the economic impact of the restrictions that were imposed, the central banks strongly increased the issuance of money.
However, once the debacle was over, the central banks opted to return to boosting the economy and the markets by relaxing liquidity; which began the development of a new “bubble” in the asset markets, which they only began to try to “deflate” from 2016. Unfortunately, this greater monetary austerity lasted until the pandemic broke out. To moderate the economic impact of the restrictions that were imposed, the central banks strongly increased the issuance of money.
At the time of greater restrictions, the difficulties in spending that excess currency and, in some cases, such as in Argentina, fears that limited banking services would lead to a shortage of cash, caused demand to increase. In this way, there was no significant loss of currency value; but that changed when the restrictions were lifted and it became easier to spend or withdraw money from ATMs. The demand for currency began to fall and, therefore, also its purchasing power; which slowly was reflected in the prices of goods and services.
The central banks and governments came out to justify this incipient inflation due to logistics problems or a shortage of supply; which was not the underlying problem. It should not be surprising that the variation in consumer prices continued to rise. Then, central bankers argued that it would only be temporary, but it was not. The reality is that nobody wanted to end the party. Upon receiving excess liquidity; markets; allowed profits that seemed to have no ceiling, which, in turn, when spent, boosted the economy. They only listened to some economists who, since the end of 2020, had been warning that it was necessary to recover monetary austerity, once the horrible restrictions due to the pandemic had been overcome, or we would run the risk of having another crisis or, at least , an escalation of inflation.
With inflation, purchasing power is taken from those who have a greater proportion of their assets in currency and less ability to defend their savings, to transfer them to those who are financed with that issue
The reality is that central banks have been inflating “bubbles” in all asset markets as they continued to increase liquidity. An example of the investments that were artificially encouraged by this excessive availability of money were “cryptocurrencies”, whose values rose spectacularly and are now plummeting.
It is true that, since the end of 2021, the world's main monetary authorities understood that liquidity had to be adjusted again. However, the reluctance to pay the necessary economic cost has led to hesitation in its actions. This is very dangerous; since it may be the factor that ends up "popping the balloon", something that we do not know if it is already avoidable. What is certain is that, if there is no outbreak, it will be because the central banks begin to act with more austerity and responsibility than what most analysts estimate today.
An additional clarification. People all over the world complain about the impoverishment they are suffering due to inflation, which even in some developed countries exceeded 10% per year, which they consider outrageous. However, this should not be surprising. It is the cost that is paid for creating these excess liquidity and depreciating the currency so that some can spend and/or earn more money at the expense of the future well-being of the whole. With inflation, purchasing power is taken from those who have a greater proportion of their assets in currency and less ability to defend their savings, to transfer them to those who are financed with that issue (for example, the State). It is only enough to study cases like Argentina to realize the damage that the monetary mismanagement of central banks generates. Perhaps, in all countries, they should require officials applying to work in central banks to study these “tragedies” and, that way, there would be fewer crises.