Financial system: The "Monetary Supercycle" as an inflation driver

The Western world is in the late stages of a monetary supercycle that has been expanding strongly in several waves for the past 50 years. Its drivers are expansionary central bank policies and excessive increases in money supply. The dynamics of the supercycle have accelerated dramatically since 2020, but are now reaching their limits. In the medium term, a perfect storm looms that could shake the global financial system and cause severe economic and social dislocation. These are the key messages of the FERI Cognitive Finance Institute's new study "The Monetary Supercycle - Causes, Meaning and Potential Consequences of Massive Monetary Inflation". "The enormous monetary inflation of the global system poses high risks. Assets are already highly inflated, but now the real economy is also threatened with rising inflation. If the price dynamics continue, confidence in monetary assets and currencies - but also in central banks - will quickly erode," warns Dr. Heinz-Werner Rapp, founder and head of the FERI Cognitive Finance Institute.

Progressive monetary dilution in waves

If one looks at the development from an overarching perspective, the worrying pattern of increasing escalation emerges, he says. Accordingly, the "monetary waves" come at ever shorter intervals; at the same time, each new wave exceeds the preceding one several times over in terms of magnitude and intensity. The instruments of monetary inflation range from simple money supply expansion to central bank-induced securities purchases (quantitative easing) to the open monetisation of government debt and deficits by central banks (overt monetary financing). A look at the major central banks shows how explosive the situation is: for example, the balance sheet total of the US Federal Reserve has increased tenfold since 2008 due to the huge volume of newly printed money; the ECB now has six times as many assets on its balance sheet as it did 13 years ago. "This massive inflation of the financial system is extremely worrying. At the same time, central banks are providing monetary government financing through the back door by taking over large volumes of government debt," Rapp said.

Underestimated inflation risk - credibility problem for central banks and politicians

The global financial system is increasingly vulnerable to systemic crises due to the consequences of the monetary supercycle. The risk of inflation in particular is currently being severely underestimated, he said. "Politicians and central banks hardly perceive demonetization as a problem anymore. Instead, they see it as a solution, for example to get rid of high government debt," explains Rapp. This distorted perception results from the fact that structural effects such as the rise of China, demographic developments and digitalisation have had a dampening effect on prices over the past 20 years. "However, these factors are now losing much of their effectiveness," Rapp said. Most recently, he said, the inflation rate in the U.S. reached its highest level in 13 years at over 5 percent, while Germany also saw a sharp rise in price trends to a 28-year high. The combination of high inflation rates and low economic growth could significantly increase risks to the financial system in the coming years, he said. "Central banks would then have a serious problem for the first time that cannot be solved by printing money again," Rapp warns. Investors and asset holders should be aware of this explosive situation and act accordingly critically and with a strategic perspective.

The study "The Monetary Supercycle - Causes, Meaning and Possible Consequences of Massive Monetary Inflation" is available for download here.