Coupled with the liquidity created and the central banks’ lack of defensive strength, inflation is likely to become a chronic problem.
(Photo: dpa)
The policy of the European Central Bank (ECB) is controversial. In view of the high inflation rates, critics are calling for an end to the asset purchase programs and interest rate hikes. This is the only way to prevent a self-reinforcing spiral of rising prices. Others point to geopolitical tensions and special effects after the corona shock. The ECB can do nothing for gas prices and supply bottlenecks.
Given the weak economic recovery, reflected in the euro zone’s economic growth of just 0.3 percent in the last quarter of 2021, the ECB would actually have no reason to step on the brakes in normal times.
The problem: We haven’t been in normal times for more than ten years. Even more aggressively than the US Federal Reserve, the ECB has tripled its total assets to 60 percent relative to gross domestic product (GDP) since 2010 through purchases of securities worth billions. Superficially intended to combat deflation, these purchases served to stabilize the euro zone by preventing a rise in interest rates for highly indebted countries.
Debt keeps reaching new highs, most recently 355 percent of GDP on a global level. According to management consultancy McKinsey, more than 40 percent of global wealth growth since the year 2000 can be attributed to falling interest rates. Bank of America estimates that the Federal Reserve has accounted for more than 50 percent of the rise in US stock prices since 2010.
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Everything depends on money staying cheap. The Economist estimates that a 2% rise in interest rates would increase the interest burden by 50%, to 18% of world GDP. It is inconceivable that this would happen without a massive debt crisis, without a collapse in the asset markets and without a deep recession.
Central banks are stuck in a dead end
No wonder the central banks are doing everything they can to classify the increase in inflation as “temporary”. They are stuck in an impasse: if they don’t respond to rising inflation, they will fare like they did in the 1970s, when “temporary” inflation became permanent. If they react, they threaten to plunge the world into crisis.
Daniel Stelter is the founder of the discussion forum beyond the obvious, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
(Photo: Robert Recker/ Berlin)
What happens now? The US central bank is trying to bring inflation under control with small steps, the ECB is counting on words being enough. Let’s hope that the balancing act succeeds.
Looking ahead, it is clear where the journey is headed. Influencing factors such as globalization and demographics, which have had a deflationary effect in the past, are reversing. In addition, there are structurally increasing prices in the course of decarbonization.
Coupled with the liquidity created and the central banks’ lack of defensive strength, inflation is likely to become a chronic problem. In view of the consequences of significant interest rate hikes, this unfortunately has to be seen as the lesser evil.
More: High inflation, a lot of criticism – the difficult relationship between the head of the ECB and the public