Person of the week: “Madame Inflation” is swimming with the flood of money

Tuesday, November 16, 2021

Person of the week
“Madame Inflation” is swimming with the flood of money

By Wolfram Weimer

Instead of fighting runaway inflation, the ECB continues to flood the markets with new money. ECB President Christine Lagarde is thus the face of the new inflation, the pressure on her is growing. But she is in a dilemma.

Christine Lagarde has become the greatest money maker in history. The total assets of your European Central Bank have now cracked the astonishing mark of eight trillion euros. Last week it reached the record sum of 8.38 trillion euros. Since the beginning of the Corona crisis, it has skyrocketed by 3.6 trillion euros in just 21 months. That means: Under Lagarde, which has been in office for two years, the ECB is pumping 171 billion euros into the market every month, with an additional 5.7 billion euros every single day.

This not only triggers a wild speculation boom on the stock and real estate markets. Inflation is now reaching consumer prices as well. The German inflation rate rose to 4.5 percent in October, its highest level in 28 years. German savers are worried, and there is growing resentment among the population about widespread increases in prices. “Attention pensioners and savers, inflation is eating your money”, warns the “Focus”, the “Bild” newspaper railed against the “Price hammer”, and the “world” even sees that “Germans’ prosperity at risk”.

Critical voices of the ECB policy are increasing from German politics. Even in the discreet German financial sector, rows of board members are warning of the aggressive monetary policy of the ECB.

“Fall in inflation is taking longer than expected”

Lagarde felt the increasingly critical mood at the beginning of the week in the European Parliament. After having downplayed inflation for months as a “short-term”, “temporary” phenomenon based on “special effects”, she now admitted to parliamentarians that “the phase of increased inflation in the euro area” is probably more than just a phase: “The decline will take longer than originally thought,” she admitted her misjudgment.

At the hearing, CSU MP Markus Ferber, the monetary policy spokesman for the largest EPP parliamentary group, confronted Lagarde with the accusation that citizens are gradually losing confidence if they are being “robbed of monetary value” month after month due to high inflation. Not only in the European Parliament are there increasing voices accusing Lagarde of a one-sided politics of interests. Lagarde wanted to specifically finance France and the southern EU states with their high national debt through their zero interest rate policy, including bond purchases. The demonstrative resignation of the Bundesbank President and inflation critic Jens Weidmann is a beacon.

In the environment of the Bundesbank, it is assumed that Lagarde is acting for political reasons. France is heading for the 2022 presidential election, a turnaround in interest rates would only be a problem. Only after the election in France will she change her course – but that is irresponsible for the stability of the value of money in Europe. The nickname “Madame Inflation” is now circulating for Lagarde in Frankfurt. While the Fed has already initiated the turnaround in monetary policy in the USA, Lagarde refuses to tighten any monetary policy reins. According to Lagarde in the European Parliament, a rate hike is “not in prospect”. She explains thinly: It remains very unlikely that the conditions for an interest rate hike in the coming year will be met.

“Not quite so temporary”

In Frankfurt, meanwhile, the Deutsche Bank boss Christian Sewing counters the arguments of Lagarde and calls for a change of direction in monetary policy: “And that sooner rather than later,” he warned at the Euro Finance Week in Frankfurt. “The supposed panacea of ​​the past few years – low interest rates at seemingly stable prices – has lost its effect, now we are struggling with the side effects.” Nicolo Salsano, the new head of HSBC Germany, sees it similarly: “We also see that the subject of inflation is not quite as temporary as it is possibly postulated by political circles.”

Cornelius Riese, co-head of the leading cooperative institute DZ Bank, recalled that the ECB had warned of deflation in recent years in view of the low inflation rates at the time. “For me the question arises: Where is the ECB’s awareness of the problem, what is synchronous with the topic of inflation?” The DZ Bank has even calculated what Lagarde’s monetary policy will cost German savers: deposits, bonds and insurance will be devalued by an average of 2.3 percent this year. The resulting loss of purchasing power in private financial assets should amount to 116 billion euros. That is around 1,400 euros per person, warns Michael Stappel, chief economist at DZ Bank.

The chief economist of the British central bank Andy Haldane has been warning for a long time that inflation is a “restless tiger”. While the economy is slowly recovering from the corona crisis, the tiger is difficult to tame. Haldane says what many financial experts currently fear: “For me, the big risk right now is that the complacency of the central bank will allow the big cat to get out of the bag.” The danger is that inflation will prove difficult to control.

The dilemma

But Lagarde is in a dilemma. If it continues to pursue its expansionary monetary policy, it will not only risk its personal reputation, but also deeper inflation, speculative bubbles and, ultimately, a crisis of confidence.

But if it stops the flood of money and bond purchases, then interest rates are likely to rise. However, neither the highly indebted countries can afford higher interest rates, nor are they good for the eurozone’s economy, which is just picking up again. The national debt of Italy, for example, has climbed to 2.7 trillion euros. A rise in interest rates would make debt servicing much more expensive in one fell swoop. All over Europe, states plunged into new debts during the Corona crisis. In Spain, for example, national debt, measured against gross domestic product, rose from around 95 to around 125 percent. In Greece it is even 210 percent. And France, particularly protected by Lagarde, reports a record level of 115 percent. If the ECB were to turn things around quickly, these countries might have problems obtaining fresh money on favorable terms on the financial markets. Even a new euro crisis could not be ruled out. The room for maneuver of “Madame Inflation” is getting smaller, the presidential chair, which was so pleasantly reputable two years ago, has become a fire chair.