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The current rise of prices in food and energy continues to catch the attention of everyone here in Europe and in other parts of the world. It just so happens that for Europe and France in particular this is the time of a presidential election while for the US the midterm elections are just around the corner in the fall of 2022. 

But everyone is now clearly convinced that these price increases that we are experiencing right now seem to be a lot more than just a temporary and transitory phenomenon as central banks would like us to believe. No need to hold a PhD in economics to get that right. As I said previously in a previous post I had already highlighted though it appears that the European Central Bank and all the central banks continue to view this price pressure as a simple adjustment and that all that’s needed now is to tighten monetary policy in due time while taking the appropriate measures to reduce the balance sheets of the central banks which stand now at unfathomable levels. 

This stance is still rooted in the belief that monetary policy remains the ultimate answer to all problems. At the back of every policy maker’s mind you will find the belief that once monetary policy has done its job then the “invisible hand of the market” will do its magic. 

But what caught my attention in the last few days were these few seconds where President Biden cursed a journalist, unaware that his microphone had not been switched off. Of course all the media kept talking about the fact that he cursed, not really paying attention to what he actually said in these few seconds preceding that curse. Let me repeat these few seconds because we will continue to talk about them in the next few years.

The question that the Fox news journalist was asking off record, was the following: “Do You think inflation is a political liability?” and Biden replied, kind of casually “No it’s a great asset. More inflation.” And then came the curse that everyone kept focusing on, not realizing that these 7 or 8 words that he had just uttered were actually the most important statement ever made in the last few years.

After several years of never seen quantitative easing and sluggish growth, we have reached a point in the debt accumulation that has become unsustainable. What these 7 or 8 words reveal is that there is clearly a temptation to let inflation do its job and erode these himalayan mountains of debts, chipping them away and gradually expecting to see an exit route. Few years ago, right before the COVID crisis, Ray Dalio was already expecting that this next phase will not see the “classic tightening of monetary policy”. You can already feel in the statements made by central banks right now that this is where are. So perhaps policy makers are now at this place where they have to announce tightenings a lot more creatively than what has been done so far. We’ll get back to that later. 

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