(Kitco News) – Consumer prices may be showing muted inflation pressures as the world continues to feels the effects of the COVID-19 pandemic but a major inflation threat is looming on the horizon according to one chief economist.
In a telephone interview with Kitco News, Thorsten Polleit, chief economist at Degussa, said that instead of focusing on consumer inflation, investors need to pay more attention to the growing money supply as this is what is going to general higher inflation for years to come.
Polleit’s comments come as governments and central banks around the world continue to flood capital into financial markets to support the beleaguer global economy. In a recent report, the International Monetary Fund said that $12 trillion has been pumped into the global economy. Data published last week showed the Federal Reserve’s balance sheeting hitting a new record high above $7 trillion.
“People continue to ask: ‘Where is the inflation,” he said. “But you just have to look at equity markets, real estate and bond prices. At the moment inflation is impacting asset markets. But the increase in the quantity of money that has been printed in the U.S. as well in the Euro area inflation will sooner or later also push up consumer prices.”
“It may take a while for inflation in asset markets to show up in consumer prices it will eventually happen,” he added.
Polleit said that there are two major issues the global economy has to deal with when it comes to all the money that has been printed by governments and central bank.
The first issues is currency debasement and the loss of purchasing power. Polleit said that wealth is being destroyed as currencies lose their purchasing power. He added that the create of more money doesn’t make people wealthy.
“Money is just a means of exchange. The wealth of a nation comes from the products it produces, the apples it grows and the homes that it builds,” he said. “More money doesn’t make a nation wealthier.”
In the current environment, as the pandemic has reduced production output among many nations, Polleit said that now the growing money supply is chasing fewer products. As governments look to initiative new lockdown measures as the COVID-19 pandemic see a new upward swing, Polleit added that people and businesses are now almost completely reliant on government money.
“Right now there is very little production so very little wealth is being created,” he said.
The second significant issues being created is the growing disparity between the rich and the poor. Investors with diverse portfolios are seeing their wealth grow as inflation drives financial markets higher; meanwhile consumers who don’t have investment accounts see more hardships as their dollars by fewer and fewer goods.
“Inflation benefits some at the expense of others,” he said. “As the quantity of money rises, it has various effects, but eventually it will make the great majority of people poorer.”
Although government deficits and central bank balance sheets are rising, Polleit said that the current financial system can continue to function without hitting a critical tipping point; however, he added that there is a simple solution faced by the global economy: give people the freedom to choose their currency.
“The root of the problem is our current monetary policy and the use of unbacked currencies. We have created a global economy of debt and that is driving inflation,” he said.
Polleit added that when it comes to creating a currency that preserve’s its purchasing power, gold is the best asset. He noted that it has a 1000 years of history as a store of value.
Because it’s mined and produced, gold can’t be easily devalued. As to whether or not the gold market is big enough to represent a new global currency, Polleit said that he doesn’t see that as a major hurdle.
Polleit added that the evolving digital currency market means that there is technology available to make gold a global monetary asset.
However, until gold is a recognized global currency, Polleit said that it is an asset that investors need to have in their portfolio.
“Holding gold is the best way of getting a risk reduction and return enhancement in your portfolio,” he said. “Holding gold, especially at current prices, is a wise thing to do.”
Author: Neils Christensen