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Former Minister of Finance Van Overtveldt predicts 'shrink-flation’

May 13th, 2022

coin jar with arrow indicating shrink inflation

Several economists recently predicted stagflation. Economist and member of the European Parliament Johan Van Overtveldt goes a step further: he sees a "shrinking inflation" coming our way. According to Van Overtveldt, the central banks are partly responsible for and the receding of centrist parties in global politics.

The former Minister of Finance made these remarkable statements on Tuesday during a webinar organised by Unbox on the occasion of his new book 'The Mystic Hand' (Agate, Chicago, 2022).

In a 45-minute interview with journalist Tom De Smet, Van Overtveldt talked about how central banks such as the American Federal Reserve and the European Central Bank (ECB) laid the foundation for the current economic difficulties by keeping interest rates low even after the financial crisis of 2007-2009 and by buying up government bonds en masse. This far too lax monetary policy, reinforced by 'black swans' such as the pandemic and the war in Ukraine, is now leading to high inflation, the peak of which we have not yet seen, according to Van Overtveldt. "We will go to double-digit inflation," he says in the webinar. Among other things, the Chinese zero covid policy is pernicious, according to the Member of the European Parliament.

The result of this sky-high inflation will be what Van Overtveldt calls 'shrinkflation': a combination of a shrinking economy and high inflation for a long period of time. This will further reduce purchasing power. That purchasing power has already fallen sharply in recent years due to the monetary policy of the central banks, Van Overtveldt said in the interview. He compares central bankers to Butch Cassidy and David Copperfield. Like Butch Cassidy, they stole from the future. And like the magician David Copperfield, they made things disappear: the savings of many people, which became worth less and less. "If you had 100 euros in a savings account ten years ago, today you only have 80 euros of purchasing power left. And with the current situation, in two years' time that will probably be 60 euros.

Van Overtveldt therefore holds the central banks partly responsible for the loss of votes for centrist parties in, for example, France and Belgium. "People have worked hard, saved a lot, and when they finally want to enjoy their savings, they find that their value has evaporated. That leads to anger and a dislike of what they see as the political elite, and steers their vote to more extreme parties."

You can watch the full interview here.


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