I would be grateful if Mr Treacy could provide comment on which casualty will government and central banks choose

The way I see the situation now is:

Printing money to save banks = increasing inflation + sinking small people
Raising interest rates = reducing inflation + sinking banks + sinking small people with adjustable/variable mortgages
EQUALS
government and central banks caught in vicious circle of their own making

Which casualty will in Mr Treacy's opinion governments + central banks choose going forward?

Eoin Treacy's view

Thank you for this question which may be of interest to other subscribers. The big question is about the permanence of inflationary pressures.

In your first scenario, the return of excessive money printing takes place before inflationary pressures are under control. That would greatly increase the scope for a wage price spiral and would result in significantly higher interest rates than are currently in place. The net result would be a complete repricing of asset prices and financial risk which equates to market crashes in stocks, bonds and property. That sinks everyone not just small people. In fact, the least affected would be those with fewer assets.

The second scenario is  taking harsh tasting medicine now to forestall the scenario one outcome. Anyone who bought bonds between 2018 and 2022 is sitting on losses. There is no way to get around that fact. Floating rate note holders are in a difficult position too and the longer this situation lasts the bigger the liquidity questions will get. The only way to manage that is with targeted support at the major stress points, while avoiding supplying broad spectrum assistance.

The primary cause of inflation is too much liquidity fuelling excessive demand, and too few workers to meet demand. The logical solution is to shrink the economy to the size of the available workforce which would kill demand. The greatest challenge of administration is choosing between two bad outcomes. To me scenario 2 is short-term pain for long-term stability. Scenario 1 creates a long-term crisis that will be exceptionally painful to pull out of.

From a geopolitical perspective, it is essential scenario 1 is taken because the alterative is a chronically weak position for liberal democracies while autocratic regimes are relatively unencumbered by inflation.


The Dollar is weaker and gold stronger as investors price in the difficult path between