Nov 22, 2011

The danger

Nowadays, some economists think that the increase in inflation will be the trend for the next period. Therefore, the monetary mass which is in people’s possession will increase substantially together with interest rates (both for borrowers and lenders) and all prices. The result is a lower standard of living.

The real facts are: all interest rates have fallen to a historic low, the quantity of money which belongs to the population has been decreasing in the last few years and there is a constant pressure on prices to decrease. This pressure is coming from a lower level of demand for all goods and services. The trend is clearing the way for deflation.

Many Central Banks tried to raise the monetary mass by the Q.E., i.e. by buying a lot of bonds before their due dates or by printing money, without any result in the markets. Large quantities of money were transferred from the state to a few persons (individuals or companies), most of the time without anything real in return.

Currently, all this new money is now in the markets and it is feeding ‘bubbles’ on commodities like gold. Asset prices have also been decreasing.

The danger comes from the possibility of transfer of property rights from people to Q.E.’s beneficiaries at a deflated prices.

Every political decision should have a cost-benefit analysis. If this is the case, all costs will have to be met by the general population because all new and existing money is public money. The short term credit for these decisions will go to the current politicians because social benefits will not follow the path of public revenues, which would have been the normal situation, i.e. all public deficits being financed by borrowings. Benefits for the long term will go to those who lent money to the state because they will gain the power to influence political decision making.

I entitled the article “The danger” because I suppose that the main role of public government is to represent the interests of majority. If this is not true, this article could be a true economic forecast for medium and long term period.

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