Combating high inflation effectively requires a single ingredient: determination. And it is precisely this word that describes the difference between American and European monetary policy. America is taking action – in Europe the boat is shaking.
The US Federal Reserve is determined to stop currency devaluation, the ECB is not. Of course, they would like lower inflation rates, but they shy away from the risks and side effects.
In rider language there is a sentence that also applies to the central banks: “The rider forms the horse.” Even if the horse weighs up to ten times more than the rider, it is significantly faster, stronger and, if the worst comes to the worst, more defensive. When the horse forms the rider, it’s not a pretty sight. Sooner or later the rider will make a thud.
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Therefore, the following applies: The rider forms the horse, gives it support and shape. He sets the pace and pace.
That’s exactly what Fed Chairman Jerome Powell is doing with his demonstrative determination to get the runaway inflation under control. He is clear in his giving of help. He knows where he wants to go. He is leading the markets by holding tight reins of his interest rate policy.
The Fed has raised interest rates for the third time by 0.75 percentage points to a range of 3 to 3.25 percent. The message is clear: Inflation, which fell only slightly in the US in August and was measured at 8.3 percent, will fall further. Powell is strict: “We have to put inflation behind us.”
For him, there is no alternative to this attitude, even if it will slow down or possibly even turn the growth of national product and jobs into a contraction: “I wish there was a painless way to do this. But there isn’t one.”
ECB President Christine Lagarde tries to do the same, but fails. In their board of directors, and this is where the trouble begins, there are too many employees who want to go at a different pace. The Portuguese central bank governor Mário Centeno warns against raising interest rates too much. His route: “As small steps as possible.”
It is also rumbling in Italy. Because with every increase in interest rates, Italy gets more and more in a bind: the refinancing costs of a state that cannot keep up with its income and therefore relies on the alimony of the world financial markets rise steeply. Prof. Giacomo Corneo, economist from the Free University of Berlin, already has an inkling of where this will end: “Italy’s future government is hoping for EU money.”
In London the same chaotic picture. The central bank raises interest rates, but as soon as the markets react to the pound sterling with price losses, government bonds are bought again – i.e. the printing press – counteracts this.
Even the otherwise so polite Börsen-Zeitung in Frankfurt jumps at the face of this indecisiveness: “With all due respect: One shouldn’t be angry if some market participants think of terms like headless or desperate with this approach.”
1. Anyone who dares to visit a grocery store, a car dealership, or even a restaurant feels the money in their wallet go soft when they pay. As long as suppliers of goods and services see a chance to live out their fantasy of raising prices, they will. Everyone passes on the pain they feel to the next person in the economic cycle. The ECB’s indecisiveness is boosting inflation expectations.
2. The lack of determination on the part of Europeans in Frankfurt and London is weakening the euro against the dollar. One euro has meanwhile cost $0.97 – the lowest level in 20 years. The pound fell to a new all-time low of $1.0350.
With each weakening of the euro, Europeans have to pay more for goods and services traded in dollars, even though they are not getting more. That means: The weak euro itself becomes a driver of inflation. If the euro weakens, prosperity dwindles.
3. International organizations such as the OECD have been warning since yesterday that the risk of a global financial crisis is increasing. Because the most commonly chosen currency for debt contracts is the US dollar. According to the Bank for International Settlements, dollar-denominated loans to non-banks outside the US total about $12 trillion.
The consequence: The debts for non-American companies and states that have borrowed in dollars increase in the respective national currency. And ongoing interest payments are becoming more and more expensive as interest rates rise.
This is indeed bad for the debtor countries, but it strengthens the US. Many investors are trying to avoid this pincer movement and prefer to invest directly in the dollar area, i.e. in American government bonds or in those shares that are offered to them on Wall Street.
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, Chairman of the Management Board of the Handelsblatt Media Group. You can subscribe to his free newsletter here.
World financial markets love US determination. This makes this country and its currency a safe haven in a world of turmoil. People like to drop their anchor here. In Europe, on the other hand, the boat is shaking. And the people standing at the railing look like: you and me.
