There is a break in the ECB’s monetary policy. The increase in interest rates is no longer conditional on the euro area central bank terminating the purchase of bonds. This approach can seriously widen the gap between rich and poor.
The rich will be even richer and the poor even poorer. Such may be the result of the monetary policy which the European Central Bank itself has denied to this day precisely because of this threat. Today, however, this taboo is being removed. Must. The spread of wealth scissors throughout the euro area as a result of monetary policy is thus now a threat acknowledged by the main monetary policy institution itself, the “guardian of the euro”.
In the area of the monetary policy of the euro area – and indeed monetary policy in general – this is a turning point with potentially far-reaching consequences, economic but especially social.
ECB President Christine Lagarde has admitted for the first time that the central bank of the eurozone countries will apply what it has forbidden so far, namely the concurrence of rising key interest rates on the one hand and a large-scale bond buyback program on the other. Until now, the ECB has always said that a prerequisite for starting to raise interest rates is the previous termination of the bond repurchase program.
So it’s different. What does it mean? The ECB will now raise its key interest rates while pushing down interest rates where they run the risk of spiraling out of control. Interest on debt from over-indebted countries such as Italy, potentially France, is also at risk of slipping out of control. The ECB is willing to trample on its current principles in order to save these economies, which are among the largest in the euro area.
The ECB is saving the markets, trouble is threatening in the south of Europe
Last week was a bloodbath not only for cryptocurrencies and stocks, but also in the government bond market. The ECB has now announced that it will speed up work on a mechanism to reduce the bond yields of poorer and richer countries.
For example, at the end of last year, ECB member Isabel Schnabel claimed that the concurrence of interest rate increases and the bond-buying program could potentially open up wealth scissors in society. The bond repurchase program is squeezing interest rates more generally, making it cheaper for rich people to finance the purchase of real estate or shares. However, poorer people usually do not own any real estate or shares, so they do not have that much from the program.
Pouring oil into the fire
The bond-buying program – also known as the quantitative easing or “printing of billions of new money” – is more generally seen as beneficial to society as a whole at a time when inflation is more consistently below the central bank’s inflation target. If inflation is low, there is a risk of the opposite – deflation. If there were a so-called deflationary spiral, a general fall in prices in the economy would mean that companies would not cover their costs and would have to lay off large-scale layoffs – initially rather low-skilled workers from the poorer classes.
Therefore, until now, the ECB has been able to argue that while buying bonds may inflate stock and real estate prices, it is also using the same program to prevent the poor from losing their jobs. So the rich and the poor get better.
Economist David Marek: We will all become poor. Real estate doesn’t have to protect us either
January’s record inflation may not be the highest number this year, says Deloitte chief economist David Marek. The development of energy prices will be decisive. In order for people to protect their money and not “eat” it of inflation, they have to invest it, says the economist. However, this carries a risk. According to him, even investing in real estate may no longer be advantageous.
However, if inflation in the euro area is now about four times the ECB’s target, deflation does not, of course, pose a threat. The ECB thus finds itself in a situation it has not experienced, in which it must justify the repurchase of bonds other than by the threat of deflation. The repurchase of bonds is a pro-inflationary factor. So the ECB today also actually admits that it will pursue a pro-inflationary monetary policy at a time of record inflation.
It will further encourage the rise in stock or real estate prices, so that the rich people who have invested in them will be better protected than the inflation, which the ECB will partly help to spin, than the poor. Especially for the poor, record inflation – partly still spun by the European Central Bank – will bite a substantial part of the purchasing power of their savings, if any. The poor do not have property in shares or real estate. Inflation can thus harm the poor more than the rich, precisely because of the ECB’s monetary policy.
However, the ECB must continue with the bond repurchase program, because without it, the bankruptcy of countries such as the one in Italy would be seriously imminent. By buying the Italian government’s bonds, the ECB is squeezing interest on the Italian debt, which makes it possible to delay the possible insolvency, that is, the bankruptcy, of Italy.
Dalibor Martínek: Should we investigate inflation or go through it? Or is there another option?
It is fascinating with what nonchalance some leading Czech economists wave their left hand at inflation. But please, thirteen percent, what is it. Thirty years ago, we even had twenty percent here, and we survived. And don’t ask me anymore, I keep talking about inflation, I don’t like it anymore. The real lightness of being.
Read more comments by Lukáš Kovanda here
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