How the ECB is endangering the euro – and what it means for bitcoin
As deflationary money, Bitcoin serves as a hedge against runaway inflation. This is already being felt in many developing countries. Why the ECB is putting the euro at risk and why we need Bitcoin now more than ever.
Inflation is one of those things. Even if the Bitcoin community likes to use the central banks‘ expansive monetary policy as a reason to call for high inflation rates: There is currently no talk of inflation. In fact, the price level in Germany is actually declining. To be Bitcoin Machine more precise, the inflation rate officially determined by the Federal Statistical Office for December 2020 was minus 0.3 percent.
And that is quite astonishing in view of the considerable flood of money with which the European Central Bank (ECB) has literally flooded the market over the last twelve months.
#ECB balance sheet back >€7tn ahead of this week’s meeting. Hit fresh ATH at €7,015.7bn as Lagarde keeps printing press rumbling. ECB’s total assets now equal to 69% of #Eurozone GDP vs Fed’s 35%, BoJ’s 130%, BoE’s 36.4%. pic.twitter.com/UVB0erhc2u
– Holger Zschaepitz (@Schuldensuehner) January 19, 2021
The ECB’s balance sheet has risen from just under five trillion euros to now over 7 trillion euros within a year. The balance sheet total now amounts to 69 per cent of the Eurozone’s approx. 18 trillion euro gross domestic product.
The purchase programmes that have made this unique monetary experiment possible have meaningful titles such as „Pandemic Emergency Purchase Programme“ (PEPP, volume: 1.85 trillion euros) or „Corporate Sector Purchase Programme“ (CSPP). Behind these are ultimately decisions by the ECB Governing Council to inject further liquidity into the market by purchasing assets such as bonds.
The abbreviated conclusion from the expansion of the money supply in the Eurozone would now be an analogous inflation. After all, more money with stagnating economic output suggests an increase in prices. But the inflation is not coming. Why is that?
The money is in the hoards
Economists like the former president of the Ifo Institute for Economic Research, Hans-Werner Sinn, don’t believe it. According to them, low inflation rates measured against the basket of goods give a false picture of the actual situation. In reality, Sinn said during his Christmas lecture, appropriately titled „Corona and the miraculous multiplication of money in Europe“, the ECB has fallen into the liquidity trap.
In a nutshell, this is a market economy situation in which low interest rates meet high savings balances. The large amount of money is not flowing into government bonds, but into consumers‘ savings accounts, as it is assumed that the economic situation will worsen and interest rates will soon rise again. In such a situation, monetary policy is ultimately ineffective.
In this context, one also speaks of „money hoards“, where all the money is kept.