Here’s How Central Banks Will Finally Unleash Inflation: The Shenzhen Case Study
The comments below are an edited and abridged synopsis of an article by Tyler Durden
In 2009, when the Fed first launched QE, many thought it would spark inflation because the hundreds of billions of dollars of liquidity injected into markets were expected to find their way to the broader economy, triggering sharply higher prices as a result of global currency devaluation.
While one part of this forecast turned out to be true, with asset prices hyperinflating in the subsequent decade, the flood of central bank reserves did little to boost wages.
A decade later, with central banks injecting $300 billion each month, the 10Y continues to trade below 1%, because, having failed to spark broader inflation, the market thinks that nothing the Fed does can change this default dynamic.
But if consensus was wrong about the economic outcome of the first QE back in 2009, could it be just as wrong now, and with most expecting deflation no matter how big the QE, could central banks finally succeed in sparking inflation? The answer is yes, and it will come in the form of digital currencies.
How will it work in practice comes from China, the most advanced nation in digital currencies. China ramped up trials with the digital yuan last April, running a pilot program that reportedly included US companies like McDonald’s.
The world’s central banks are rushing to roll out the idea of issuing digital currencies. In October, the BIS and seven central banks published a framework for central bank digital currencies, or CBDCs.
Without any liability (it’s not a loan or a debt), the propensity to spend the digital currency is limitless and almost instant. After all, it’s money that the central bank creates out of thin air and hands out to whoever it chooses, a form of massive universal basic income or unprecedented population subsidy, hoping to spark higher prices.
It’s how central banks will atone for the fact that their policies didn’t boost wages in the past decade; now they will simply hand out money with little regard for the consequences, as long as the consequences allow some of the massive global debt tsunami ($277 trillion, or 365% of GDP) to be inflated away.
