ECB with a turnaround in interest rates – a failure with an announcement

The turnaround in interest rates is finally here! Is that really her? For the first time in 11 years, the ECB is preparing to raise rates again, by 25 basis points to – now get this – 0 percent. No joke. This act of desperation alone makes it clear how clueless and haphazard the currency watchdogs in Frankfurt are. They have nothing to counter either the historically high inflation or the current crises. The ammunition has been completely used up in recent years. The financial crisis, the euro crisis and most recently the corona crisis have pushed the ECB further and further into a corner. At the same time, they have also started to work in secondary theaters of war, such as the green transformation with the Green Deal. The answers to each of these crises have always been the same: print money and cut interest rates. The keyboard was played to the extreme inflationary. Bottom line: The constant printing of money has inflated the ECB’s balance sheet to a gigantic 8.81 trillion euros, which corresponds to around 84 percent of the economic output (GDP) of the euro zone.

Total assets of the ECB

The result is a historically high inflation rate of 8.1 percent in the euro zone and 40 percent of government debt is on the ECB’s balance sheet. At the same time, the governments are in debt up to their necks and need inflation more than the ECB is comfortable with in order to inflate their debts at the expense of the citizens. Because they are the ones who foot the bill through rising prices, because the purchasing power of the citizens of the EU is being taken away more and more at the same time. Hand in hand, the asset price bubble has risen with the ECB’s balance sheet in recent years. Stocks, classic cars, works of art, real estate, etc. all have continued to swell in euros. This only reflects the loss of purchasing power. For example, if you bought a property ten years ago, you now get twice as many paper certificates for the same property – whether renovated or not.

The property has not doubled in size nor has the property doubled in size, it just goes to show that the purchasing power of paper ECB notes has halved in value and we have all lost de facto purchasing power. According to the Federal Statistical Office, the euro has officially lost more than 35 percent of its purchasing power since the euro was introduced in 2001. But if you take a more objective equivalent value, such as the price of gold, we have a loss of purchasing power of more than 90 percent, which comes a lot closer to reality when you see how property prices, stock markets, etc. have developed. The ECB has thus made the rich richer and the middle class poorer in a planned economy and socialist way. We have seen nothing but what I predicted to be the largest transfer of wealth in human history from the bottom, middle and top to the very top into the hands of fewer and fewer. This is the Cantillon effect, which unfortunately works like clockwork. The ECB’s seemingly ridiculous rate hike, which seems timid and uncertain, does justice neither to the 8.1 percent inflation rate nor to the debt burden.

The next crisis is already inevitable!

As always, the ECB reacted too late and too little. It cannot increase interest rates significantly, otherwise the southern states of Europe would collapse one after the other. The ECB is caught between fighting inflation or bailing out the euro and southern Europe and keeping it alive. Everything together does not work. The next big crisis is already looming. A look at government bonds in the euro area makes the dilemma clear: government bonds are already wide apart again. Italy currently has to shell out 2.5 percent more interest on the capital market for new debt than Germany. For a country with a debt-to-GDP ratio of nearly 150 percent, every percentage point is painful.

The ECB is in the endgame

In Germany we are seeing a 50-year high of the inflation rate at 7.9 percent. Blaming all this on the war in Ukraine is too easy. Even before that, we had well over 5 percent inflation. In this chart you can clearly see how high inflation rates were fought with rising interest rates in the past.

Policy rate versus inflation

This time, the European Central Bank has the problem that the interest rate is 0 percent, which means that the ECB’s room for maneuver in Frankfurt is more than limited. But this is not the only problem: Because we also have war in Europe, the collateral damage of the Corona crisis such as broken supply chains, an impending recession and lockdowns in China, and an energy crisis that was partly caused by a wrong energy transition itself. All of this points to a major crisis.

So the ECB now has to decide between plague and cholera: fight inflation and thus end the euro currency experiment and send the zombie states into bankruptcy or save them and risk hyperinflation. No matter how you twist and turn it, both lead to the same result: the end of the euro!

Marc Friedrich is a six-time bestselling author, financial expert, sought-after speaker, pioneer, free spirit and founder of the fee-based consultancy Friedrich Vermögenssicherung GmbH for private individuals and companies.

His new bestseller was the most successful business book of 2021: The Greatest Opportunity of All Time – What we now have to learn from the crisis and how you can benefit from the greatest wealth transfer of mankind

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Twitter and Instagram:: @marcfriedrich7

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