According to leading economists and the main financial media, the US Federal Reserve and the European Central Bank are not about to allow any increase interest rates because inflationary pressures are not permanent according to these wise folks. Inflation will somehow disappear when the supply chains get organised again and people go back to work…
Somehow there were more than enough boats and containers before Covid and there were also enough workers to fill all the jobs. Unemployment was rather high and low wages for ordinary workers were rather low.
But on the other hand, wood, iron, steel coal, oil, food, fertilisers, shipping costs, share prices, housing in most developed countries have all increased. Bosses have seen their salaries and bonuses go to new heights and banks and many companies are showing handsome profits and buying back their shares with shareholders clapping loudly… and there is no sign of lasting inflation in front of these economists mentioned above… Come on guys, prices have already gone up by quite a lot more than the famously advertised 2%!
Australia, Canada and the UK have seen the yield on their short term bonds increase even though long-dated bonds have not seen any increase in their yields… The Central Banks from three countries have stopped buying bonds to keep interest rates low. Wages will increase in the EU and in the USA as they have done in China. Higher prices mean higher wages, and higher wages means higher inflation….
The “wise” economists are saying that Jay Powell (US Fed) and Christine Lagarde (ECB) are not changing their low interest rate policies by slowing down or stopping their massive bond purchasing policies called QE (Quantitative Easing). QE is a fancy name that Italy’s PM invented when he was the President of the European Central Bank. It is an expression that means nothing by itself because the real meaning of QE is too dangerous for ordinary folk to understand. It is simply a massive money printing machine that is financing governments around the world with dirt cheap money. Not only is this financing national governments budget deficits but it is also replacing what the World Bank and IMF has been doing! Who needs to deal with the “austerity-preaching” folk at the World Bank and IMF when you can talk to your own friendly chaps at your Central Bank. They are all appointed by the same politicians who are running the government. It is all a very friendly environment.
Central Banks are not meant to provide finance to their governments’ deficits, but they do it by pretending that they are buying these bonds in the secondary markets for. Banks who are market makers. Naturally the banks play along with this fabrication of the Truth. The banks make a very nice profit from buying the bonds from the various national Treasuries. They hold the bonds in their portfolios for a couple of weeks and then sell them to the Central Bank as a “Secondary Market Transaction” just like a second-hand car salesman! It is said that the ECB has been buying up to 30% of all new government bond issues. That is massive…
So, back to the story… Italy, an EU member and a very big beneficiary of EBC’s generous QE bond purchases, is in deep trouble and with a huge public debt and plenty of organised corruption. The market has started once more to price Italian government risk as clearly more risky than the German government. Things are getting hairy inside Europe because if Italy runs into the same type of trouble as a decade ago then we will all be crying… and let’s not forget that one of their oldest banks is already in a terrible state because of gross mismanagement – criminal mismanagement would be a better expression. The government will be on the hook for that as well as the EU member states through the EU’s Banking Union plans…
There is little reason to think that Draghi can solve any of Italy’s structural problems before his term runs out. He is soon to be 75 years old and that is a turning point for most people.
So believe what you like, but do not expect that low interest rate are here to stay. The writing is already on the wall in big letters.
