Global Concern Over Inflation Rising Prices Widen Gap Between Rich and Poor

Central banks flooded the world with cheap money for years, helping the rich get richer. Now inflation is on the horizon, threatening to make the poor even poorer.

By Wolfgang Reuter

The stock markets are harbingers of economic hardship. Each stagnation, downturn and recession goes hand-in-hand with falling stock prices, often even a market crash. The biggest crashes have names: Black Friday in 1929, or Black Monday in 1987.

This stuff may soon become more expensive.

This stuff may soon become more expensive.

But sometimes a spike in prices signals that the worst is yet to come. Axel Weber -- president of Germany's central bank, the Bundesbank, and a member of the European Central Bank (ECB) governing council -- is well aware of that possibility. For some months now, he has been watching the steep gains in international securities indices, especially on the commodity futures exchanges, with growing concern.

For instance, the price of spring wheat, which is traded on the Minneapolis Grain Exchange, has jumped from $5.50 a bushel (about 35 liters) in May to $9 today. A year ago spring wheat was selling for only $4.60 a bushel, a little more than half the current price.

Within the last year, the prices of corn and soybeans have increased by up to 70 percent in key trading markets. The prices of many metals, lumber, rubber, wool and other raw materials used in the manufacture of consumer goods have also been rising steadily for months. Other data and price developments also suggest that hard times may be ahead. Besides, the price of oil keeps hitting new record levels.

Alarm Bells

Weber finally sounded the alarm last Sunday. "As a central bank, we are certainly worried," he said. "What concerns us is the rise in prices across the board, that is, not just in the energy and food sectors. Inflation could increase to 3 percent by the end of the year." That would be the biggest price jump in 14 years.

Jürgen Stark, the chief economist for the ECB, was also full of grim warnings that the risk of inflation in the euro zone has grown in recent weeks -- despite the international financial crisis and an economy curbed by the strong euro. These were unusually clear statements for central bankers, who normally choose their words with great caution.

The mixture of rising prices and a weakening economy is a nightmare for every central banker and economic politician. It inevitably brings higher unemployment, a decline in government revenues and growing poverty.

What Weber and Stark prefer not to mention is that the fault for this calamity lies with them and their counterparts from the world's leading central banks. For years, they flooded the world with more money than ever before in history. Their chief aim was to jumpstart their respective economies and keep them humming.

At first, all this cheap money had its inevitable and intended effect, acting as a lubricant for economies around the globe and, apparently, as a blessing for the world.

The Curse of Cheap Money

But now this low-interest rate policy is becoming a curse. In recent years, it has already contributed significantly to growing income disparity. The rich got richer, both in Germany and, to an even greater extent, in the United States. But now the flood of liquidity let loose by central bankers has become almost uncontrollable. Like sorcerers' apprentices, the central bankers made mistakes when determining the dose of the magic bullet and, in doing so, have maneuvered themselves into an almost hopeless position.

German inflation is pointing upwards.

German inflation is pointing upwards.

If they raise interest rates to curb or at least reduce rising inflation, the financial crisis could lead to a massive economic slump. But if they keep rates at the current, relatively low level, prices will continue to rise, inevitably making the poor even poorer.

It was a Wednesday when things began to go haywire in the world. But at the time no one had any idea that this was in fact happening. On January 3, 2001, Alan Greenspan, then head of the powerful US Federal Reserve Bank, lowered the US prime rate from 6.5 to 6 percent. The event in itself was relatively insignificant, but it marked the first of a total of 13 steps in which the monetary watchdogs reduced key interest rates to a pitiful 1 percent.

From the Fed's perspective, this makes complete sense. Unlike the ECB, whose only goal is monetary stability, part of the Fed's job is to stimulate the economy, and there is no better way to achieve that than with low interest rates. Saving money becomes increasingly unattractive as interest rates fall. Instead, it makes more sense to spend money, or even to borrow money and use it to invest in companies. In this situation, the economy can go nowhere but up.

The world's two other important central banks, the ECB and the Bank of Japan, also lowered their key interest rates, to 2 percent and 0.1 percent, respectively.

Inflation Surge

But cheap money has a price. It's called inflation.


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