It’s not a secret the cheap debt policy from the European Central Bank has really helped out several European countries to keep the government finances under control. Well, more or less, as several members of the Eurozone are still running huge budget deficits.
Source: European Commission
When the ECB was created, its main ( and sole) mission was to keep an eye on the monetary policy in the Eurozone and to ensure price stability. The focus was on the inflation rate, which should be approximately 2% as that was thought to be ideal in the longer term. In order to keep the economy going and to boost the inflation rate, the ECB has started an asset purchase program just a few years ago. This would allow the Central Bank to pump more liquidity into the system.
This plan was expected to have a ‘trickle down’ effect, but in reality most of the cash has been sticking to the wrong fingers. Banks and asset managers are benefiting, but the common man on the street doesn’t notice any benefit.
Au contraire, as the requirements for mortgages are becoming more strict, and you can just forget about easy access to credit cards or personal loans.
So let’s be clear, the low interest rate isn’t serving any other purpose than to make the institutions rich.
And we aren’t talking about a few billion and not even about a few hundred billion euro, as you can see on the next chart. The counter is at in excess of 1.6 trillion… and counting.
Source: Royal Bank of Canada
But perhaps more important, it also avoids the annual government budgets to fall off a cliff. In fact, even Jens Weidmann, one of the most fierce opponents of the buyback program, now expects the ECB to continue the purchase program.
‘Vorsorge ist notwendig’. Precautions are necessary.
That’s the verbatim quote of Weidmann in the previous edition of the Frankfurter Allgemeiner Sonntagszeitung.
Every single country in the Eurozone is benefiting from the ultra-low interest rates. The biggest winner seems to be Germany, which has saved 250 Billion in the past 10 years compared to where the interest rates were in that year.
As you can see on the previous image, the net government debt in the Eurozone continues to increase. It currently stands at 9.5 Trillion Euro.
This means that every 1% increase in the interest rates would cost all Euro-countries 95B EUR per year on a combined basis. That’s an additional TRILLION in the next ten years.
Even though everything seems to be going just fine on the surface. But deep down, the problems are still still there. The world is addicted to cheap debt and once the ECB-drip will be removed, countries will be facing hundreds of billions per year in additional interest payments.
The main question now obviously is whether or not the interest rates will increase? In her speech on Friday, Fed Chairwoman Janet Yellen definitely seemed to be hinting at yet another rate hike later this month, as the American economy is doing better than expected. This is the complete opposite of the European side of the story, where it’s starting to look like the interest rates will remain negative for a longer period, even though the REAL interest rate is currently -3% (as the inflation rate in the Eurozone has been picking up lately).
And this could easily and immediately bring us back to last week’s topic: currency wars. With a continuously low interest rate in the Eurozone and an increasing interest rate in the USA, the US Dollar will technically gain quite a bit of strength. And that’s exactly what the current president doesn’t want, as he’d obviously like to see the USA increase its exports.
When stakes are high on the monetary front, it’s always a good idea to have an insurance policy and allocating a part of your assets to precious metals usually isn’t a bad idea.
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