ECB Announces More “Creative Destruction”

As ECB chairwoman Christine Lagarde announced more interest rate hikes for the future on June 27, reactions among economists split between those who said “it’s too much” and those who said “it’s too little”. While the former warn that EU economies are already in a recession and higher interest rates will inflict more damage, the latter insist that inflation in the EU is still too high and must be urgently curbed.

Both camps are right and wrong at the same time: right in criticizing the insanity of the ECB policy but wrong in the solutions suggested.

The ECB monetary policy is insane, because it’s based on wrong assumptions as to where inflation comes from. Since energy prices have somehow cooled down, Christine Lagarde explained that inflation is now driven by “climate change” and “corporate greed”. Both alleged causes are not only wrong, but border on the grotesque. After years of mass brainwashing, policy makers can now invoke climate change for any issue without fear of being laughed at. As for corporate profits, this line was first put out by the Biden Administration as a scapegoat for the real cause, namely the spin-off from the financial bubble which central banks have inflated for decades.

True, producers and vendors have increased prices to recover profits, but this has been for them a question of survival, as margins to match increased energy costs were exhausted. And energy costs, as we have often documented, were a result of the shift of financial speculation from assets to commodities.

Nevertheless, Ms. Lagarde announced: “We will have to bring rates to ‘sufficiently restrictive’ levels and keep them there ‘for as long as necessary’.” Thus, the ECB will continue a monetary squeeze which has so far increased rates by 400 basic points in eleven months, a historical record.

By doing this, the ECB is following textbook economics, according to which increasing the cost of money will reduce demand and therefore inflation, but this is nonsense. EU household consumption has been flat or negative for the past 36 months. If inflation were due to an excess of demand of goods vs. supply, it would since long be down, as demand has now re-balanced itself.

The only thing that increasing interest rates achieves, is completing the destruction of the productive economy and household consumption, which was already initiated by the man-induced energy crisis. While production in energy-intensive sectors has fallen by two digit figures throughout the EU, the PMI index (manufacturers’ expectations) in June is gloomy: 40.6 in Germany, the largest manufacturing economy in the EU, 43.8 in Italy (the second largest), 46 for France and 43.8 for the EU as a whole. In the U.S., it’s down to 46. (An index above 50 indicates growth: for comparison, the June index for China is 55.6 and for Russia 52.6).

Furthermore, each rate increase automatically produces a depreciation of bank assets and capital, which has been so far calculated at $620 billion for US banks (although some estimate the real figure to be over one trillion). Thus, the next banking crisis is pre-programmed.

The solution is not to go back to low or zero interest rates, as many economists and politicians demand, while a return to liquidity pumping will re-ignite the system’s hyperinflationary potential. The only solution is to destroy that potential through a banking separation reform, such as the 1933 Glass-Steagall Act in the U.S. that separated investment banks from commercial banks, but on an international scale. Such a reform would eliminate the blackmail of the Too Big To Fail Banks, allowing governments to protect depositors’ money in those banks which are needed to extend credit to the real economy and to households, and leaving investment banks, stuffed with unpayable speculative debt, to their destiny.