I agree that the ECB has created a problem for itself by making it difficult to raise rates as this would be troublesome for the highly indebted countries (Italy, for instance). But I am (so far) less concerned about the rise in the money supply, True, its growth rate is higher than at any time since the euro was created but I don’t see it translating into much higher inflation. A lot of this extra money is being kept as savings. I think one can put it like this: You get 100 EUR and you don’t want to spend it. But where to put it? Not in a possibly overvalued stock market. Not in bonds as they pay close to zero interest, if not negative rates. Thus, it makes sense to keep it as money. In short, money supply is up quite a lot but so is money demand – but not in order to make purchases. As we would say, money’s velocity has slowed down.
Hi Morten, thanks for your analysis on the situation.
I would like to hear your thoughts on my take on the situation..
We don’t see wage-driven inflation because of the high unemployment rate (https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Unemployment_statistics). In the same time, we see increasing pressure on inflation due to irresponsible money printing by the ECB (all central banks, for that matter), which have flodded the economies with record levels of debt while keeping interest rates artificially low (https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html).
So my concern is this. While economy is not in great shape (given the unemployment rate and drop in economic activity) and high debt rates (incentivized by artificially low interest rate environment), the central banks cannot increase interest rates to fight the inflation. Otherwise, the rate spike would give a big blow to the economy, which is already weak due to high unemployment rate. As a result of this scenario, we are looking at stagflation – high inflation caused by central bank massive money supply increase and high unemployment caused be weakened economy. Central bank cannot increase the rates due to high debt rates across the economy while governments cannot increase economic support due to massive budget deficits (how further you can go from existing deficits?!)
Where do i get it wrong? Thanks.