It was the month of January and anyone who mentioned inflation was often labeled a bogeyman. The ECB has adhered to its target of heating inflation in Europe to approach the two percent limit. At that time, however, the inflation rate was already double the target, or five percent; at least it will double by the end of this year. But the ECB has just noticed it: it has fueled inflation, pouring more and more cans of gasoline into the fire, even though this undesirable development has long been clear.
Nobody saw it coming?
And now Christina Lagarde, head of the ECB, is turning back. At a meeting of central bank governors in Sinatra, Portugal, you acknowledged the mistakes. You are wrong. Monetary policy is not pure science, but “also art”. Stupid when prices run away, he says now. She is not alone in this form of naive self-criticism. Economic models have weaknesses, Lagarde said now and wants to clarify how things stand to the recent misconceptions about inflation risk: “This is a useful exercise.” Among other things, the ECB has underestimated the rise in energy prices.
Broadcast on 02.12.2021
Tichys Outlook Talk: “Inflation comes suddenly” – an interview with Hans-Werner Sinn
Bank for International Settlements (BIS) Director General Agustin Carstens also admits errors. “Today we understand inflation a little better than before, but we don’t understand everything.” The importance of aggregate demand for inflation and economic growth has long been debated. Now it is necessary to deal more with the overall economic offer. And “We now understand better why we know so little about inflation,” said US Federal Reserve Chairman Jerome Powell. “We thought that after the pandemic, supply problems would disappear faster.”
So you were wrong. Or did you like to be deceived? Or even scam the public?
The obvious errors of monetary policy
You just have to go back six months to name the ECB’s dramatic blunders: inflation at two percent as the target – which in itself is already shabby. The currency devaluation is not a thermostat on the living room radiator with which you can change the room temperature at will. Inflation is a complex phenomenon. But sufficiently studied and explained. Of course, we know enough about inflation to explain its arrival. First, there is the money supply. Every economy needs money to process the necessary payment transactions. Gold coins were used for this; no economy without coins. If coins were scarce, trade and production stopped due to lack of money. But how much “money” does the economy need?
Take, for example, the central bank’s money supply that was sufficient to fuel the European economy before the 2008 crisis and the Great Financial Crisis. Nearly zero inflation, moderate growth, the economy is reasonably in order. Those were so 880 billion euros. That much lubricant had been enough for the eurozone economy to function well. The European economy has not grown since then. Only the money supply has increased, not production, not consumption. In January it was around € 6.1 trillion. “Just under five trillion 6.1 trillion euros is superfluous compared to what is sufficient for economic output,” Hans-Werner Sinn calculated in January.
This sum of about 5 trillion – about six times that of consumers and need of the economy, the ECB has substantially scratched the states for their indebtedness. It’s hanging around in bills, vaults, and doesn’t do much damage.
The match in the petrol barrel
The damage, i.e. inflation, only occurs when there is a shortage of supply for some reason. This was the case for two years: because of Corona, less was produced, supply chains collapsed. Russia’s attack on Ukraine. These are the sparks to ignite inflation. The central bank’s many trillions of money are fuel.
This mechanism is well known. All inflationary processes follow this pattern: States get into debt, money is abundant and at some point it happens. The monstrous inflation of the 1920s was triggered by the amount of money the German Reich had financed the First World War. The real trigger for post-war inflation was the occupation of the Ruhr area by France and the general strike against it in Germany. No production without Ruhr coal and Ruhr steel; and if there is a strike, there is still a shift in the tree.
Special meeting of the ECB
The soft euro and inflation: the curse of bad action
Prices started to rise and then exploded. On the way from the payroll office to the baker, the workers’ money paid in this way became useless. Instead of sandwiches – hungry. This mechanism repeats itself over and over again. It has been described, studied and analyzed thousands of times.
Whole schools of thought take their name from it, such as “monetarism”, which, in short, presupposes that it is money that fuels these processes. So the money supply must be strictly controlled. The ECB has violated this. Instead of fighting inflation, which would have been their job, they took over government funding and “printed” money – today that means: generated at the push of a button in electronic systems. It is impossible to list all the critics who have warned of the consequences. Christine Lagarde and her colleagues now claim they don’t know. If so, then it’s either a lie – or a filing for intellectual bankruptcy. Because every economics student learns these connections in their basic studies. Only in the ECB does this seem unknown. The consequences are devastating.
Variations on the theme – Greenflation
Of course, there are some variations on the basic principles. Like “supply-side inflation”. When goods are in short supply, they become expensive. That’s not bad, the economy is controlled through this pricing mechanism. Consumers and the economy adapt to price changes. They dodge, look for other products, change production processes and preferences. To put it simply: if butter gets expensive, margarine goes. And the peasants put more cows in the stable; more cows, more milk, more butter, falling butter prices: the market economy reacts. If gas gets expensive, people switch to oil. Or coal. Or atom. But stop. What if everything got more expensive? So all prices go up and there are hardly any adjustment mechanisms; Even changing tastes doesn’t help much anymore.
Politics bypasses citizens’ concerns
Now it’s here, inflation
But this is precisely the consequence of global “greenflation”. Fossil energy should become more expensive to save greenhouse gases. Germany is leading the way, shutting down coal and nuclear power plants. Agriculture needs to be curtailed because cows produce greenhouse gases. Groceries would have to get more expensive to reduce consumers to a slim fit. The process has many variations, but always one effect: everything becomes more expensive because each product contains fossil fuels. This is on purpose.
Agriculture is affected in three ways: First, because agricultural production in the fields and in the barn is made more expensive by a large number of “green” laws. Secondly, as the fertilizer, tillage is energy intensive as the farmer no longer cuts and threshes the grain by hand. Third: the transformation into food, that is, the meal on the plate, baking, cooking, freezing, defrosting, reheating and everything else, consumes a lot of energy.
The Food and Agriculture Organization (FAO) food index has reached its highest level since 1961. Edible oils top the list of global inflation published by the Food and Agriculture Organization (FAO) (increase by 135% since April 2016), followed by cereals (92%) and dairy products (91%). Meat at 39 percent and sugar at 30 percent increased less. This inflation starts with the farmers, continues through each processing stage and ends at the supermarket price tag. This has also been a long-known process, probably only outside the ECB.
And this is where the real problem begins: this process is intentional and has a name: the term “greenflation” has now become commonplace for it. Not “real inflation” at all, according to the euphemistic description of the effect. It is about saving the global climate, about “real costs”, not about the consequences of monetary policy. But it’s an admission: this form of inflation is intentional, planned, deliberately determined – and its effects on the consumer are as devastating as any other cause:
- energy consumption becomes more expensive through the targeted increase in taxes on fossil fuels, which are called CO2 taxes – expensive energy, on the other hand, makes all subsequent products, transport and mobility more expensive;
- energy production becomes more expensive closing nuclear and coal plants and trying to compensate for this with more wind and solar energy, which costs many times more and requires huge investments in plants, transmission grids and compensation for energy shortages;
- The gas must replace other sources of energy and widely used to generate electricity and heat. But the price of gas in particular is expected to rise significantly if the Russian pipeline is replaced by liquefied natural gas (LNG). However, it is not Putin who is driving energy prices yet, but the “energy transition”. The consequences of the war in Ukraine will be felt and will be even more so when there is a gas boycott;
- Groceries are too cheap, is the mantra of agricultural policy; Food is now becoming more expensive due to the use of expensive energy, forced withdrawal, the ban on fertilizers and various “animal welfare measures”;
- Economic combustion cars are being replaced by expensive electric cars, for which there is also a lack of electricity and the necessary charging infrastructure. In return, existing supply networks, vehicles, technologies and factories are devalued and consumers are burdened with new burdens that raise prices.
It is the “Great Transformation” policy that reduces prosperity through rising prices and falling net income. Everyone should become poorer for the sake of the climate.
And Christine Lagarde didn’t know? Then it would be an intellectual bankruptcy. But perhaps it is intentional: then it is green politics. Eventually, prosperity will dwindle. Not for mysterious reasons, not for unexplored connections. No, she is on purpose. Inflation is politically deliberate, it is imposed on people who are not funded by taxpayers such as Green officials, politicians and NGOs, but who have to support themselves through employment or contribution-funded pensions. Inflation is a deliberate attack on human well-being. Everything else is bullshit.