Inflation is here, now it is clear to everyone, even to those who have long remained in denial, namely the political and monetary authorities, who see their toy (the painless financing of deficits) breaking. The latter still believe that the episode will be temporary, what a joke! Perennial forces are at work: the money printing machine that exploded with Covid and continues to turn, zero interest rates, the energy transition that is extremely expensive, and the producers of raw materials who are taking advantage of the windfall and increasing their prices. The prices of electric cars are rising: already very expensive and requiring heavy subsidies, how can this economic model survive, without weighing too much on the government's budget?
In short, inflation is here to stay. But the question now is: can it degenerate into hyperinflation? In the United States, the Fed has announced monetary tightening, consisting of a gradual increase in its key rate. This rate hike is by no means a foregone conclusion, as public and private debt has reached such levels that a solvency crisis could arise, but at least the will is there. It should be noted, however, that abandoning zero interest rates would only solve one of the causes of inflation, as we have seen...
The ECB is also announcing a forthcoming rate hike, but with much less conviction. And above all, a risk specifically linked to the eurozone is emerging and posing a serious threat:
#ECB to the rescue? #Italy's yields keep rising. 10y jump to 3.4%, highest since 2018. pic.twitter.com/W2EPnir4CS— Holger Zschaepitz (@Schuldensuehner) June 3, 2022
Italy's ten-year debt rate is climbing dangerously: it has risen three points since its low in mid-2021, which is enormous. And if the Italian government starts to have difficulties financing itself, the whole edifice of the single currency will crumble! Moreover, sovereign risk means bank risk, and we know that Italian banks have been in a bad position for a long time.
A debt crisis affecting Italy, and also Greece as in 2011, Spain, Portugal and possibly France, would shatter the timid attempts of the Frankfurt institution to return to normal. After the Covid's money printing, the ECB would be obliged to do another one to avoid the explosion of the eurozone. And in this case, yes, we would go straight to hyperinflation. A money printing that would be added, as we recall, to the rise in raw materials and the very costly energy transition.
The figures of 50% or 70% annual inflation experienced by Argentina or Turkey, for example, would then become the common lot of Europeans. This would obviously be a cataclysm that would call the euro into question, and a movement back to national currencies would begin, starting with Germany in our view.
The United States does not face this situation, and the international demand for dollars protects it from excessive money printing. Moreover, it has significant energy resources (when the price of gasoline rises, the consumer suffers but local producers benefit, and overall national income remains stable, whereas in Europe it is money that goes abroad). Consequently, the United States seems to us to have little exposure to this risk of hyperinflation.
In Europe, on the other hand, this hyperinflation scenario must be taken seriously, as we are only at one phase, that of a sovereign debt crisis, which is starting to show its face...
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