How the ECB tripped up the turnaround in interest rates and weakened the euro

Producer prices in Germany are rising by 37.2%, energy prices continue to skyrocket, the euro continues to depreciate – but the key rate set by the ECB is just 0.5%.

“Mind the gap!” – “Mind the gap!” – is the announcement before the doors close and the train speeds away to disappear into the impenetrable blackness of London’s “Tube”. The gap between platform and train is particularly treacherous on the London Underground, so accidents are inevitable. The same is true these days on earth, when the world’s central banks raise interest rates to stop inflation.

The ECB is not the Fed

While the ECB is still hesitating, the US central bank is rushing forward. The Fed raised interest rates by 0.25 percent for the first time on March 16 this year. A larger rate hike of 0.5 percent followed on May 4 and even a 0.75 percent increase on June 15. On 27 July, the Fed raised the interest rate again by 0.75 per cent. In just five months, the Fed accomplished an unprecedented turnaround in interest rates. Those were the biggest rate hikes since 2008. Back then, at the height of the global financial crisis, the Fed cut interest rates by 0.75 percent several times in a row. The federal funds rate is currently 2.5 percent. The Fed’s next interest rate decision is scheduled for September 21.

ECB and Bank of England

The Bank of England also carried out an interest rate reversal. On August 4 at the latest, it raised the key rate again by 0.5 percentage points to 1.75 percent. The Bank of England said it was the biggest rate hike in 27 years. Speed ​​is needed on the island because inflation is currently at almost 10 percent. For the UK, the Bank of England expects a further increase in inflation to up to 13 percent in the fourth quarter, despite the unusually sharp rise in interest rates. The second most important central bank in Europe after the ECB is preparing for a long inflationary war.

Euro and Dollar – two elevators down

The larger the interest rate gap between the dollar and the euro, the faster the flight of investors from the euro becomes a problem for the ECB. The falling demand for the euro seals its depreciation. The euro is currently at parity with the US dollar (1 euro = 1.0040 dollars). September 2021, the rate was still 1:1.15. Stating the value of the euro in relation to the dollar is – to put it bluntly – a financial “lie”, because the dollar and the euro are two elevators going down. The rising price of gold only partially reflects the decline in both currencies. The gold market, narrow and small as it is, is subject to a variety of manipulations. The global market participants and above all the central banks of this world are stocking up just in case. Perhaps to have a solid base in case of a future devaluation.

ECB in a dilemma

Unlike the Fed or the Bank of England, the ECB is in a bind. If it keeps the policy rate at zero or below zero, inflation will probably be in double digits. The EURO will then become even softer, with devastating consequences for citizens and the real economy. The recession then seems inevitable. If, on the other hand, the ECB tightens the interest rate screw significantly, the wobbly towers of debt in the over-indebted southern countries will begin to falter.

According to Thomas Mayer, the founding director of the Flossbach von Storch Research Institute and the country’s leading financial economist, the ECB would need to bring the policy rate above the inflation rate to effectively stop excessive inflation. With an average inflation of 5 percent per year, the key interest rate should therefore be between 5 and 6 percent. The Italian government bonds would then go up in flames and the Italian state would collapse because it could no longer refinance itself. The interest rate for ten-year Italian government bonds is currently 3.4 percent, for German 1.22 percent.

ECB: Negative interest rates are a market phenomenon

Let’s leave the depressing terrain of current central bank policy and turn to the basics, the question of how negative interest arose. The ECB used the narrative that unprecedented technical progress combined with globalization had led to negative interest rates. The argumentation is admittedly much more demanding and complex. But that only hides the significant involvement of the Fed and the ECB in this development. Due to the interest rate cut in the wake of the 2008 global financial crisis, the financial markets were flooded with money to mitigate the dangerous financial crisis in the world’s banking markets. Managed.

Negative interest a contradictio in adjecto?

Basically, negative interest rates are a contradiction (contradictio in adjecto). Money is a store of time. “Remember that time is money; he that could earn ten shillings a day by his work, and goes half the day, or lazes in his room, though he only spends sixpence on his pleasure, must not count this alone, he has spent five shillings above, or rather thrown away away,” Benjamin Franklin instructs his friend in his Advice to a Young Merchant in 1748. The Fed and the ECB can set the policy rate arbitrarily. However, they cannot stop time. Negative interest rates are about as absurd as trying to stop the constant march of time by not turning the hourglass.

Interest according to Böhm-Bawerk

Ludwig von Mises’ teacher, Eugen Böhm von Bawerk (1851-1914), explained interest as a time-related difference in value. People will value goods that are immediately available more highly than those that will only be available in the future. The time preference is increasing, i.e. positive. Can the interest rate therefore be negative? If money is primarily a store of time, then interest is its return on time. Interest is money in time. It is necessary for the interest rate to rise; because the value of time increases the less it is available. Time is the most precious resource that humans have. Because it is limited. The time we have is the difference between the number of grains of sand at the top of the hourglass and those at the bottom.

Interest like a clock

Modern technology almost eliminates space, at least the mesometric world of people, basically the interval between a few millimeters and one or two thousand meters. She can’t stop time. Everything is subject to time, biologically the day is the monad of time. Time bends today’s events, it also rejects words and images.

As the study of the possibilities in time, the calculation of interest is the origin of all plans. Hunting the mammoth and killing it provides interest in the form of future survival, which is the possibility of reproduction. A world where interest is zero would be an ideal. For in it nothing good would be subject to time. The world, and with it the people, stopped aging. Everything would be immortal. Time is suspended in paradise. The ECB can push interest rates down to zero. However, she cannot stop time. The zero interest rate means that money slowly loses its ability to save time, that is, it inflates. Its value is fading. The economic cycle is dependent on time. Boom and bust are tides. After the ebb comes the tide.

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