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Chris Watling, chief executive at research company Longview Economics, sees the breakdown as a consequence of financialisation. That is, most newly created money since governments started to deregulate finance in the early 1980s fed into asset prices rather than goods and services in the real economy. A notable example of this was the growth of mortgage debt which has gone from around 10-20 per cent of gross domestic product to more than 100 per cent in many countries. In the UK it peaked at just short of 80 per cent in 2010.

More recently, money creation since the 2007-09 financial crisis has been driven by the central banks’ asset purchasing programmes, known as quantitative easing. This, too, has gone into asset price inflation, mainly in government bond markets.

Watling argues that this pattern has now been broken and that the latest bout of inflation stems from money creation during the pandemic going into households’ and businesses’ bank accounts in the form of emergency grants, furlough payments and other support. This was then spent, leading to old-style inflation, in which too much money chased too few goods and services.

Photo: Andy Carter


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