Today, the 15 June of 2022, will probably go to the books of the history as the day when the Euro started to die. The ECB announced that they cannot turn off the money-printing machine.
To understand the enormity of this statement, we need to look back to the history of the euro.
The euro as a currency is just 20 years old by now, but has suffered since it’s sixth birthday from one crisis after another. The financial crisis of 2009 was a heavy blow to the currency. Lots of money was printed to “rescue the euro”. The balance sheet of ECB almost doubled.
It got sick again in 2013 with the “Greek Crisis”, when the Eurogroup pressed for a sell-off of state assets and a freeze on ATMs on Cyprus.
The most serious ailment is an addiction that started on a very specific date.
Money printing = Quantitative Easing
On 22 January 2015, Mario Draghi announced the start of quantitative easing – a.k.a. money printing, on the order of 1-2 billion euro every day, with no explicit stopping date. They only presented a few stop conditions, e.g. never buying more than 33% of any country’s bonds.
Even on that very first press conference, one intelligent journalist asked if there was no risk for hyperinflation:
“And second of all, what would you say to those who are concerned that when the ECB is buying up bonds, electronically printing money, whatever one calls it, this is the first chapter in a story that leads inevitably towards hyperinflation. What’s your response to that?”
Draghi just looked in the rear view mirror and said that there will be no problem in the future, since there had been no problem in the past:
“I think the best way to answer to this is, have we seen lots of inflation since QE programmes started? Have we seen that? And now it’s been quite a few years since they started. … We did OMT. We did the LTROs. We did TLTROs. And somehow this runaway inflation hasn’t come yet.”
Ostensibly, the money printing (buying bonds at full price from governments and corporations) was intended to create “price stability” in the form of inflation around 2%. (I think this is just an arbitrary, possibly counterproductive target, but that is another story.)
Fast forward to June 2022.
Turning off the money printing machine
On 9 June 2022, the ECB governing council met for their monthly policy meeting, in the middle of the highest inflation since the 1980s. Official inflation is 8% (prices today compared with 12 months earlier). Quite a lot above the 2% target. They decided, as expected, to stop the money printing machine. No more additional free money to governments and companies. Everyone would be allowed to keep what they had received, but no additional money would be printed.
This had an immediate effect on the risk analysis of the most indebted governments, ie. Italy. (The public debt is now 150% of country GDP, since the rich don’t pay much taxes and the government spends like there is no tomorrow). The state bond interest rate spiked from 1% to 4% in a couple of days, and the government could head for default.
In a rush of frenzied action, ECB governing council came back together in an “ad hoc meeting” and decided to actually restart printing money.
This time on the pretense of avoiding “fragmentization” of the euro-zone, i.e. different interest rates for different government bonds.
Below is a full verbatim of the statement from this meeting. It is the least informative press release that I have ever read. Please judge for yourselves.
Essentially, the ECB governing council has started a money printing machine that they are unable to stop.
I can only see this end with hyperinflation.
It seems like 2023 will be like 1923.
I wish you all best of luck in the coming squeeze.
When will a bread cost 100 euro?
Please remember, that the main cause of the coming shrink is that we humans are living in overshoot of the planetary biocapacity and need to reduce over consumption to come back inside the boundaries. That is outside the power of any central bank, but I would prefer if they were more sincere and transparent.
ECB Press release
15 June 2022
Today the Governing Council met to exchange views on the current market situation. Since the gradual process of policy normalisation was initiated in December 2021, the Governing Council has pledged to act against resurgent fragmentation risks. The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions.
Based on this assessment, the Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism, a precondition for the ECB to be able to deliver on its price stability mandate. In addition, the Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.