A few weeks ago Jerome Powell, chairman of the Federal Reserve, announced that from November they would begin a process of reducing the pace of asset purchases (tapering) in the face of rising prices (October's CPI was over 6%). Will interest rates rise at some point? Will the European Central Bank adopt any contractionary measures in the coming months?
Dear Miguel Ángel Echarte Fernández,
It depends on what inflation factors will dominate. Currently, the key inflation factors include the large scale of public financial aid used as part of anti-crisis, interventionist programs supporting economic activity of enterprises and companies, counteracting the development of the economic crisis caused by the SARS-CoV-2 (Covid-19) pandemic and the lockdown introduced in 2020 . In addition, rising prices of fossil fuels, electricity, building materials, food products and many other products. If the applied interventionist anti-crisis shields are already extinguished, if central banks start to terminate their interventionist programs of buying high credit risk assets from commercial banks, buying lost assets, loans inscribed in losses and junk securities, then the key inflation factors will cease to function and inflation should begin perhaps already from the second quarter of 2022.
Best regards,
Dariusz Prokopowicz
Gradual monetary devaluation is the current centralized politics of money.
https://www.takecareofmoney.com/devaluation/#:~:text=%20Devaluation%20%28Causes%2C%20Consequences%2C%20Types%2C%20and%20Examples%29%20,monetary%20devaluation%20can%20be%20generated%20by...%20More%20
- To balance the largest amount of banknotes in circulation against the least amount of reserves, in this case the Central Bank of the country can implement the devaluation process.
The processes of devaluation of a currency usually have several consequences, some positive others negative, some of them are:
- Negative effects for local people and businesses, not so for exporters.
- Generalized loss of the real value of wages and salaries, the most affected are retirees, employees, those who maintain a debt in currencies but have economic income in national currency.
- Increase in the cost of goods, services, as well as freight, money remittances, telephone calls and practically everything.
- Decrease in purchasing power associated with the devalued currency.
- The decrease in the real value of the debts is a negative consequence for the lenders and positive for those who borrowed, as long as they have done so in the local currency.
- Encourage local tourism and the visit of foreign tourists.
- It promotes the purchase of products made in the country and exports.
- Increase inflation rates in the country.
- Political cost in the face of population dissatisfaction.
- Prepare the ground for an economic crisis
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- citation from the linked source.
To deal with inflation, central banks will reduce the amount of money in circulation using contractionary monetary policies e.g. tapering, raising interest rate, selling treasury bills, etc
This helps to pop-up the excess liquidity and excess money in the economy
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