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European Central Bank in trouble

The guys over at Zerohedge just made a very valid point, that slightly scared me. Bear with me, I’ll explain what the article says, in layman’s terms. Technically, the European Central Bank (ECB) prints Europe’s currency, but it does much more than that. By contracting and expanding the money supply (respectively by buying and selling government bonds, or removing and adding money into Europe) it regulates our monetary and economic climate. To get the economy going, the ECB has been injecting money into the system and lowering interest rates. The idea is that the additional money lowers the value of the Euro and stimulates exports. Low interest rates make savings accounts less attractive, chasing savings into consumption and investment. All these effects should kick-start the economy. Over the last months, the ECB has injected 60 to 80 billion Euro into the markets … per month. As a result the ECB expects inflation to get to just 0.2%. This implies one of two things:

  • If their forecast is accurate: their measures have little or no impact
  • If their forecast is off: they have no ability to assess the impact of their measures.