There’s three stories that defined 2021 and will shape 2022.
So, as 2021 comes to a close, it’s worth remember what a bat-crap crazy year it was, economically speaking.
Never in the history of humanity has such a strange collection of forces confluenced together.
(Actually, maybe I shouldn’t say that. I slept through history class, so I don’t know for sure.)
But not since the Bronze Age has such a strange confluence of factors come together – a confluence that drove property prices to soar 22% year on year, and rising.
So as we bring things to a close, let me lay out my pick for the themes that defined 2021, and will be the key themes to shape the first part of 2022.
1. Money Printing
So we are still, right now, in the middle of one of the strangest economic experiments in history.
And that experiment is to just print heaps of cash and see what happens.
It isn’t entirely new. It was America’s response to the Global Financial Crisis. But Aussie money printing only started with Covid in 2020.
But 18 months on, it’s still going. At a pace of $4bn a week!
It’s been a phenomenal expansion of the money supply. It’s hard to even put it in context. But take a look at the RBA’s chart of their balance sheet. (This more or less lines up with money printing. The RBA prints money and gives it to itself, and then buys assets from the financial sector to inject that money into the financial system.)
Anyway, it looks like this:
Yep. You’re reading that right. The RBA’s balance sheet was less than $200bn before Covid. By the end of 2021, it had grown to about $600bn.
That’s an expansion of $400bn.
$400 billion fresh new money sloshing around the financial system.
Where does all that money go?
Well, the American experience suggests that it ends up in asset prices. And that’d be my bet.
That money is still heading through the system, and will probably wind up in asset prices, and land prices in particular, sooner or later.
But the experiment is still live. The RBA is still printing.
And every Central Bank is doing it. Every Central Bank in the developed world has gone on a printing spree.
As I said, this is radical. Not since the dinosaurs were running the central banks in the Mesolithic Period have we seen anything like it.
Wild.
2. Inflation.
The second big trend to define 2021 and that will define the first half of 2022 is inflation.
Conventional economic theory used to say that money printing creates inflation.
However, that’s sort of gone out the window. We had almost a decade of money printing in America following the GFC, and inflation consistently undershot the Fed’s target.
So it’s not as simple as that.
But it’s still an open question. We don’t know for sure what all this money printing is going to do. (My bet is that we end up with asset-price inflation rather than consumer-price inflation, but it’s an open question.)
And we are seeing inflation lift in some places. However, for now, that seems mostly connected to supply-chain disruptions coming out of Covid, rather than excess money driven demand shocks.
So the question is, in the lingo, will inflation be transitory or more permanent?
It’s still an open question, and if it is more permanent, then central banks will raise rates and turn off the printing presses.
However, most central bankers, and most fund-managers (see chart), seem to think that it’s transitory, and inflation will disappear in the middle of next year.
But, we’ll see.
And the third big trend?
Well, you’ll have to tune in tomorrow…
JG.