Forget it! Inflation will not go down to 2% again.

There seems to be a general belief that inflation rates will drop to 2% again at some point, and we can go back to normal. Let me just be clear: This is not going to happen! Or to be clearer. Yes, inflation could drop to 2%, but it would be if, and only if, we were in a major recession, and even then, it would most likely only be true in the short term. Why?

A decades long excessive expansion of the money supply and artificially low interest rates have made the economy hooked on cheap capital, and many companies as well as the entire real estate sector cannot survive, on higher interest rates. This is what we are seeing now, where demand for housing as well as most other products are dropping as a consequence of a tighter monetary policy with higher interest rates. The banking sector is now under pressure, housing prices are dropping and even Apple have announced that they have started a hiring freeze and cost cutting exercise.

So, the FED and most other CBs, have painted, or printed one might say, themselves good and well into a nasty corner, where they are left with only two options. They can continue their fight against inflation by increasing interest rates and tank the economy in the process, which as I have mentioned before, is the better and more just option. Technically what would happen here, is that in the short term, demand drops and eases the pressure on prices, while in the long term, the effect of the recession will be that credit creation stalls, and in fact reverses, which effectively sucks money out of the system and increases the purchasing power of money.

Or, they can lower rates again, in yet another attempt to jump start the economy, and create even more inflation in the process. As I have said before, the hey-days that you have gotten used to are over, and we are entering a new era. And you know what, it’s OK. Recessions are not fun, but they are part of the natural economic cycles.

Somehow, we have come to believe that they can and should be avoided, and in this belief, we have forgotten that recessions serve a purpose and that economies cannot function and grow without them. The point of a recession is to flush out the least value generating companies so that labor and capital are freed up for other productive endeavors. And at no point in history, has this been more necessary than it is right now!