ECB and Federal Reserve: A Case of the Blind Leading the Blind

It took less than one year, in September 2019, for the Federal Reserve to stop Quantitative Tightening and reverse to Quantitative Easing, because the whole house of cards was coming down. The Fed was forced to take over the overnight (repo) market. At that point, however, liquidity-generated hyperinflation could no longer be contained within the confines of financial asset values, and began to spill over into the physical economy, with commodity speculation. As we have often documented, current consumer price inflation was not provoked by the post-Covid recovery, or by the Ukraine war, but rather by the multiplier effect of financial derivatives on imbalances created by the insane “climate policies” of the West. Thus, conventional anti-inflationary policies won’t work. Only a bankruptcy reorganization of the system could do the job.

The Fed shifted back to monetary tightening about one year ago, and the ECB about six months ago. This has opened deep cracks in the bankrupt financial system. Consider the strange market response to the recent central bank moves. The Fed and the ECB announced interest rate hikes of 25 and 50 basis points, while ECB President Christine Lagarde indicated a further half point rise to come in March. Yet stocks and bonds soared after these announcements.

The Financial Times interpreted the development as meaning that “investors bet that rates are close to peak”. However, that might understate the disconnect between the hawkish central bank language and the behavior of investors. Among financial traders, it is received wisdom that the big crash is coming, and sooner than expected. Central banks will be forced to turn back to liquidity injections on a larger scale than ever before, in an attempt to bail out the system.

In this situation, the EU’s insistence on its mix of “green” policies and sanctions can only be characterized as sheer insanity. Due to the drop in industrial and household consumption and a mild winter so far, natural gas prices have dropped to below €60/MWh in Europe (TTF Future). This is still twice the average price in 2021, and three times that in 2019, and cannot be sustained by producers, households and economic players in general. Furthermore, nobody knows what will happen on Feb. 20, when ICE opens the alternative gas market in London to bypass the EU price cap. Ergo, the energy crisis is not over and the de-industrialization threat has not vanished.

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