Central Bank Digital Currencies Would Bring Hyperinflation, by Daniel Lacalle

It’s a lot easier to inflate or hyperinflate a currency when there are no competing currencies available. From Daniel Lacalle at dlacalle.com:

There are many excuses often used to explain inflation. However, the fact is that there is no such thing as “cost push inflation” or “commodity inflation.” Inflation is not an increase in prices, it is the destruction of the purchasing power of the currency.

Cost-push inflation is more units of currency going to relatively scarce real assets. The same can be said about all other, from commodities to demand and my favourite, “supply chain disruption”. More units of currency going to the same goods and services.

The monster inflation we have endured these years first arrived through asset inflation and then through consumer prices. Now, governments and statistical bodies are tweaking the calculation of CPI to disguise the loss of purchasing power of the currency and central banks had to hike rates after the disaster created in 2020, when the massive increase in money supply went to finance bloated government spending and created the mess we live today.

Central banks know that inflation is a monetary phenomenon and that is why they are hiking rates and tightening as fast as governments allow them. However, central banks have lost a significant amount of an already low credibility by first ignoring the inflation risk and later using the base effect and transitory excuse, only to react late and slowly.

This has happened in a world where the excess in money supply growth has a number of back-stops and limits that prevent a massive increase in consumer prices through the destruction of the artificially printed currency. With quantitative easing there are a number of limits that stop inflationary pressures: As the transmission mechanism of monetary policy is the banking channel, it is our demand for credit what puts a break on inflationary pressures.

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