Brazil, Poland raise interest rates as global inflation picks up speed

Brazil has raised its key interest rate by half a point to 11.25 per cent and Poland has taken its rates to 3.75 per cent in the face of mounting price rises. But this is just a knee jerk reaction to a tsunami of inflation caused by the desperate liquidity injections into the global economy during the financial crisis two years ago.

It is the inevitable and unintended consequence of having too much money in the system pursuing a limited supply of goods. What makes this inflation more painful than the asset price inflation of the past decade is that it is most apparent in energy and food prices, although it is also blowing up dangerous stock market bubbles, not least of which on Wall Street.

1970s or worse?

Fast forward and we are back to the stock market crashes of the 70s and the roar away consumer price inflation. This has been a conscious decision by global monetary authorities who argue that a return to the depression and deflation of the 30s would be much worse. But they are gambling with the future all the same.

The danger is that economic forces become even more distorted and anarchic than in the 1970s. Then the developed world was a much smaller place with part of the world sealed off in the communist bloc and another stuck in the poverty of the Third World.

Now we have the new engines of global growth in Brazil, Russia, India and China. Only the oil rich Middle East is an old player in this game, though the smaller Oil States are very much changed since then.

The problem is that such emerging markets are more prone to boom and bust economic cycles than the old economies. They do not offer the bedrock of stability that the world needs at this time. Both Brazil and China have pursued loose fiscal policies with the state lavishing subsidized credit on projects of dubious economic sense, and this always ends badly.

Debt mountain

At the same time, the developed nations have become mired in huge debt. Inflation helps to erode this burden by devaluing principle. But it does so at a heavy cost to those on fixed incomes and prudent savers. The latter will find higher interest rates an illusion in terms of increasing wealth and a tax on their stock market investments.

So there are much more volatile financial markets ahead, rendered more difficult to read by persistent government funded interventions. How and when these will end we cannot tell, so it makes more sense to get some protection against that inevitable day rather than getting swept along with a tide that just has to turn soon.

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