Malta’s Finance Minister Clyde Caruana broke down how quantitative easing monetary policies that Western countries adopted in recent years have helped contribute to the current inflation crisis.
In Parliament last night, Caruana flagged quantitative easing – which amounts to the printing of electronic money – as one of the three major causes of inflation, along with the war in Ukraine and global supply chain problems due to COVID-19 restrictions.
“For every action, there is some kind of reaction… it is the law of physics and the same applies to the economy,” he said, harking back to the 2008 financial crisis.
“In 2008/09, one of the main problems facing governments and central banks was that the global financial system had suffered such a heavy hit and caused so much global panic.”
“Governments had to spend public money like there are no tomorrow and Central Bank governors to drop interest rates to record lows.”
“Back then, central banks decided to print as much money as possible. The general idea was that to acquire more money, more money had to be spent, and that they should therefore create as much money as possible to reduce the value of money.”
Drawing parallels with a water vendor who decides to raise the prices of water bottles upon realising that his clients have enough cash to splash and cannot acquire the same product from elsewhere, Caruana noted that flooding the market with money resulted in more inflation.
“If there’s more money in the marketplace than there are objects moving around it, then the excess money can lead to these objects getting more expensive,” he explained.
“However, inflation was the last thing on the minds of governments back in 2008. As years passed and nothing happened, everyone just assumed that inflation would never occur… and so central banks kept pumping out new money while the value of land, property and other assets kept increasing.”
As a result of the inflation crisis, many western banks, including the European Central Bank and the US Federal Reserve, have announced they will halt their quantitative easing policies.
In a recent speech, Russian President Vladimir Putin accused the US and EU of shifting the blame on Russia for their inflation woes when the cause was actually the “erroneous economic policy” of Western countries.
“We all hear about a so-called ‘Putin inflation… our actions to liberate the Donbas have nothing to do with that,” Putin said.
“It is the result of the systemic errors of the US administration and European bureaucracy. For them, our operation is a lifeline that allows them to blame everything on us.”
However, Caruana argued that Western monetary policy and the Russian war, particularly the sanctions imposed on Russia, both played a role in promoting inflation.
“A large country [Russia]’s presence in the global market, be it with regards to gas, oil or wheat, has been turned on its head. When the market witnesses such destabilisation, it’s natural for prices to explode.”
The third factor he cited was the COVID-19 pandemic, whereby major disruptions to the supply chain led to the demand for certain objects overtaking supply.
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