Vice President Luis de Gindos announced the possibility of the first increase in interest rates and the final end of QE in July. Markets are pricing with three increases by the end of the year.
This is indeed like 2008, when the ECB overreacted to a temporary oil shock and raised interest rates after Germany and Italy had already fallen into recession.
As it happens, the Institute for Economic Cycle Research has just issued a customer note warning that Germany and Italy are on the verge of recession today. Bank of America says its European credit macro indicator is flashing a red light.
In a sense, it is absurd that the eurozone still has percentages of minus 0.5% and is still making QE at a time when inflation is 7.6% in Germany, 9.8% in Spain and 11.8% in the Netherlands.
But such is the absurd situation in which the eurozone has fallen under the structure of the monetary union. The system may require negative rates forever.
Andrew Bailey, the governor of the Bank of England, is more vigilant about the dangers of excess money and resists the collision of the central bank. “We are on a very narrow line between tackling inflation and the effects of production from the real income shock and the risk that a recession could create,” he said.
There will be time for an autopsy on central bank pandemic policy.
They should not be accused of taking out an insurance policy against the risk of economic and financial collapse at the beginning of Covid. The mistake was to continue for too long with extreme QE after the V-rebound was in progress.
They got into trouble because they stopped paying attention to monetary data according to their new Keynesian staff models. These staff models have not been revised and are now being made to make the opposite mistake.
Former Fed chief Ben Bernanke said QE doesn’t work in theory, but it works in practice. Monetarists say that QE worked exactly as you would expect according to the quantitative theory of money.
If they are right – and they have been right for the last two years – this means that the sharp shift from QE to QT will lead to a drastic slowdown in broad money supply. This will mark the beginning of a collapse in assets this year, followed by economic chaos next year if central banks do not back down in time.
This episode should not be confused with the 70s of the last century, when inflation accumulated over several years and settled in collective psychology. Today, inflation expectations are still around 2% for five years and 10 years ahead.
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