ECB and Fed Rate Hikes Fail to Curb Inflation or Debt
Economist Daniel Lacalle argues that central bank interest rate increases do not address the root causes of inflation or sovereign debt. He warns that higher rates primarily burden small businesses and households while government spending continues.
Small and medium-sized enterprises in the euro area face financing costs between 7 and 12 percent. A further 25-basis-point increase by the European Central Bank raises the cost of credit for these firms. Daniel Lacalle, a professor at IE Business School, states that this policy does not reduce oil or natural gas prices. It also does not curb government deficits. The monetary debasement that undermines purchasing power remains unaddressed.
Lacalle contends that the European economy is stagnant rather than overheated. Private-sector lending and credit-card demand do not indicate excessive economic heat. Much of the remaining money-supply growth is tied to government spending. An additional rate hike raises costs for households and small businesses. It does little to address the underlying inflation drivers.
US Fed Faces Similar Constraints
The Federal Reserve faces a comparable situation at its September meeting. A U.S. rate hike would not affect energy prices or federal deficit spending. It would add pressure to families and smaller businesses. Roughly 90 percent of job creation in developed economies comes from small and medium-sized enterprises. These businesses are most affected by high borrowing costs.
Small-business financing costs in the United States run between 6.5 and 8.5 percent. A New York Fed paper suggests that staying above the neutral rate destroys about 1 million jobs per year. Lacalle argues that the Fed has less reason than the ECB to raise rates. Another hike would be detrimental to the U.S. economy.
Monetary Inflation Differs From Price Shocks
Lacalle distinguishes between individual price shocks and monetary inflation. He rejects the premise that higher oil prices automatically mean rising inflation. If oil prices increase due to an energy shock while the money supply remains unchanged, consumers have less money for other goods. Other prices should remain stable or decline. Oil-price shocks are disinflationary unless monetary inflation allows prices to remain elevated.
Reported CPI rates of 3.5 percent may not reflect reality for families. Households deal with soaring housing, food, energy, and college costs. Consumers often blame business owners for price increases. They overlook the government policies that debase the currency. The destruction of a currency’s purchasing power is the core issue.
Policy Risks Private Sector Recession
Higher rates encourage banks to hold cash at the ECB instead of lending to businesses. This policy risks engineering a private-sector recession. Government spending, deficits, and liquidity facilities remain in place. The source of this analysis is GN auto markets/bonds: sovereign debt. The debate continues over the effectiveness of monetary policy in addressing inflation and debt.
