The financial repression that central banks started after the global financial crisis of 2007-2009 does not seem to be close to an end. The central banks argue that inflation has not come back to their target of around 2%, but their definition of inflation is flawed.
They will not admit it, but one thing that has contributed greatly to the rise in inequality has been asset price inflation. Since central banks printed record amounts of money and pushed rates to historic lows in the wake of the crisis, house prices and securities prices have reached high after high.
I have long argued that asset price inflation should be included in the calculation of official inflation figures. That way, we would have a more realistic view of what is going on.
In fact, of course they will not shout it at the top of their lungs, but the main reason why central banks have resorted to this extraordinary financial repression — in which savers have been confronted by negative real interest rates for a decade — has been to push up home prices again.
Property is used as collateral for a lot of the debt incurred for consumption, but also for some of the debt taken out for investment, especially by small enterprise owners. It is therefore crucial that property prices keep rising, and this is what central banks have been trying to do.
The data on house price inflation recently released by the Bank for International Settlements show where a big part of the money printed by central banks has been going.
Data for the fourth quarter of last year show that for advanced economies, residential property prices increased by 4% year on year. But there are wild variations between regions.
In Canada, prices soared by 13% in the quarter. In Australia, they increased by 6%. This is unlikely to continue, however. It is worth remembering that these two countries are favourite destinations for Chinese investors, and Chinese authorities have put in place a series of measures at the end of last year and early this year to stem the outflows of capital.
In the UK, US, Japan and the eurozone, home prices increased by between 2% and 4%. But there are big differences between eurozone countries: in Germany, they jumped by 5% and in France they rose by 2%, but in Italy, where banks still have to deal with a lot of bad debts and could do with home price increases, they were stagnant.
Residential prices increased in emerging markets as well, by 3%, although there were big differences between countries. Home prices jumped by 9% in China and by 4% in Turkey, but crashed by 17% in Brazil and by 9% in Russia.
Still, since the financial crisis home prices increased by 30% in Brazil, by 60% in Colombia and more than doubled in Peru. In other parts of the emerging markets universe, most notably in Eastern Europe, home prices crashed during the crisis and are still well below their hyper-inflated pre-crisis levels.
The BIS data confirm the fact that central banks’ policies of printing money and cutting interest rates to historic lows did nothing but push the imbalances in the global economy even further. They inflated asset prices (property is just an example, but shares and bonds are also at incredibly overvalued levels), but have done nothing to encourage productive investment.