The line that central banks are walking is getting narrower and narrower.
(Photo: dpa)
No matter how the European Central Bank (ECB) and the US Federal Reserve wind up: the massive expansion of the money supply is responsible for the rise in inflation. Countries with lower money supply growth such as Japan and Switzerland have lower inflation rates.
This can also be seen in the rise in real estate prices. If these rise 18 percent in the US in 12 months, it has nothing to do with supply chain problems or energy prices, but with too much money.
It is long overdue for the Fed to tighten and the ECB to consider doing the same. There is already a threat of a wage-price spiral, even in Germany, where the industrial union IG Metall is entering the collective bargaining round with the demand for a wage increase of 8.2 percent.
Economists like Marcel Fratzscher deny this danger and instead emphasize the positive effect on purchasing power and demand in a difficult environment. Fortunately, ECB Director Isabel Schnabel is less relaxed.
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Unfortunately, the central banks are returning to their core task of securing the purchasing power of money at a particularly difficult time. In addition to the great danger that inflation will solidify, there is also the high risk of recession. A rise in interest rates by one percentage point increases the interest burden in the euro zone and the USA by around three percentage points of gross domestic product.
The line on which the central banks are walking is getting narrower
In the USA in particular, monetary tightening could be more advanced than the central bank interest rate suggests. As is well known, the central banks have been pursuing the policy of quantitative easing since the financial crisis. This is an instrument of monetary policy used by central banks, in which they buy large amounts of securities. It is used when interest rates have already been reduced significantly or even to zero.
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)
Former US Federal Reserve Chairman Ben Bernanke judged the measure to be ineffective in theory, but effective in practice. In fact, studies show that the effective interest rate was pushed significantly into negative territory as a result of this measure.
Conversely, this means that if the central bank slows down its purchases of securities or even shrinks its balance sheet, this will actually lead to a rise in interest rates, even if the official interest rate is still unchanged.
Analysts at the French bank Société Générale have calculated that the effective interest rate in the USA rose by 2.5 percentage points even before this week’s interest rate decision. In total, we would be at three percent, which will have an impact on the real economy with a corresponding delay. No wonder the stock exchanges and real estate markets are going into reverse gear.
The line that central banks are walking is getting narrower and narrower. If they tighten too quickly, asset markets plummet, debtors stumble and the economy slides into recession. If they tighten insufficiently, inflation becomes entrenched and confidence in money dwindles. They don’t deserve pity, as they led us into this situation. We should still keep our fingers crossed. In your own interest.
More: Dispute between Wieland and Fratzscher on inflation.