ECB Trapped in its Own “Doom Loop” as Inflation Surges

ECB Trapped in its Own “Doom Loop” as Inflation Surges

Trying to keep a financial system and a currency union from collapsing upon each other.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

To the ECB’s barely contained glee, inflation is back, alive, kicking and biting, in the Eurozone. In February, for the first time in four years, the region-wide 12-month inflation rate reached 2%.

Mario Draghi is thrilled to bits. After five years of driving interest rates to ungodly low levels, offering billions of euros of virtually free loans to Europe’s biggest banks, and scooping up tens of billions of euros per month of government and private-sector bonds and stuffing them onto the ECB’s balance sheet, which now holds €3.7 trillion of financial assets, he has finally achieved his dream of stoking official inflation back above 2%.

Now that it’s achieved its inflation mandate, Draghi’s ECB is facing increasing calls to finally begin tempering its monetary stimulus program, with a pre-electoral Germany predictably leading the way.

“It would probably be right if the ECB starts daring to head for the exit this year,” Germany’s Finance Minister Wolfgang Schäuble told the Sueddeutsche Zeitung newspaper (emphasis added). That was in January, when inflation in Germany was still below the 2% mark. Now it’s at 2.2%, its highest rate since August 2012.

In Germany inflation matters a great deal, for two main reasons. First, it is a nation of savers and renters. If inflation rises, so, too, do rents while the purchasing power of the people’s savings falls. And if wages cannot rise as fast as inflation, purchasing power of those wages shrinks.

Second (and probably most importantly), the mere prospect of inflation tends to stir painful collective memories of what happened in 1923, when the country suffered one of the worst episodes of hyperinflation ever recorded. In less than a year, Germany’s currency became worthless. Poverty and hardship spread like wildfire as the value of people’s savings and fixed incomes was completely wiped out.

The psychological scars of this collective trauma live on to this day. When, in May 2012, Schaeuble and Bundesbank economics chief Jens Ulbrich suggested the country could live with slightly higher inflation — at the time it was just above 2% — the daily tabloid Bild screamed an immediate response from its front page: “Inflation Alarm!” Accompanying the headline was a photo of a trillion-mark note from the mid 1920s.

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.