Das Aufpumpen, La Inflazione, L’inflation Augmente, Inflación

No matter how you spell inflation, whether you are German, Italian, French or Spanish, it means loss of purchasing power. Europe is finally experiencing the aftereffects of- (1) a zero-interest rate policy and (2) an increase in the money supply (M2). It got so crazy in Europe last year when suppressed interest rates became negative that a Danish homeowner (Hans Peter Christensen) was actually paid to borrow money!

“Not likely to come up for discussion at the next meeting of the FOMC, ECB, or BOJ is the story of Denmark’s Hans Peter Christensen, whose most recent mortgage statement revealed an interest payment of negative 249 kroner, i.e. his bank paid him the equivalent of $38 in interest on his mortgage. As of year-end his rate, excluding fees, was negative 0.0562%. “My parents said I should frame it, to prove to coming generations that this ever happened,” Mr. Christensen said.

You can pick up any economic book and you will never find the phrase “negative nominal interest rate.” Money has never been free before. Since currency was invented to facilitate a transaction rather than to barter, money was never loaned out without some cost to measure risk and time. The time value of money has never been negative, until the ECB (European Central Bank) went bananas and printed money to suppress interest rates and flooded the Eurozone with Euros. Risk can be lessened in a loan but a lender never assumes ALL of the risk for NONE of the profit.

So what is the result of this past laboratory experiment by the ECB to not only suppress interest rates so far below zero they became negative (below the rate of inflation) but also print money out of thin air (increasing M2)? In Germany, for example, das aufpumpen means prices of goods and services eventually pumpen up. Too much money chasing too many goods, as the economists say. The Euro becomes worth less and less the more Euros are printed by the ECB and distributed among the people. It then takes more Euros to purchase the same thing.

German Money Supply expansion (M2)

German Money Supply Expansion (M2)

For example, with a 10% rate of inflation €100 buys you €90 worth of goods. Add another 10% inflation, it only buys you €81 worth of goods, and so on until the people rebel. In the case of Germany, people are currently very angry (der boppen sie on noggin) about the rising cost of food, services and especially electricity inflation.

Decrease the value of the currency and add government mismanagement of supplying energy to the German people and voila, price spikes. Past European decisions to decrease the use of fossil fuels and nuclear energy has compounded the drop in purchasing power of the Euro.

MAP OF THE DAY: Day-ahead electricity prices in Europe are eye-watering, with lots of countries setting record highs. Notable to see the Nordics close to €400 per MWh, and Germany at €600. Before 2020, anything above € 75-100 was considered expensive| Javier Blas

Meanwhile, the Euro continues to plummet, further exacerbating the weakness of the world purchasing power of Europeans. The weaker the currency, the more imported goods (such as oil and natural gas) cost. 

The world has enjoyed forty years of lower and lower interest rates. For the past twenty years, central banks around the world suppressed rates and printed money out of thin air to allow its citizens to live a more comfortable life. Now everything is in reverse. Governments are done spending beyond their means and the central banks are raising interest rates to stem the demand for goods and services, hoping that will bring down inflation. There is a huge gap between the inflation rate of 8%-9% and the U.S. and European governments’ interest rate of 2.5% or less. Closing that gap could cause a recession, but leaving inflation alone to run rampant will cause hardship in the daily purchase of necessary goods and services and in this case, electricity.

To quote Woody Allen “We stand at a crossroads. One path leads to despair, the other to destruction. Let’s hope we make the right choice.”

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