When we presented the latest chart of the Bundesbank's record TARGET2 imbalance last night we had one simple message: we hope Germany is prepared for the rout its central bank will soon experience once the Eurozone's members start dropping like flies. Today it appears that Germany has decided to go with the flow, and in what Spiegel classifies as a "turning point in monetary policy" notes that Germany, in an abrupt shift to its Weimar-impacted history, is getting ready to embrace inflation. What this likely means is that the ECB is about to set off on its most aggressive monetization experiment ever, which also explains why all of Europe is trading diggy limit up this morning: it is not on the latest batch of horrible news - it is on the return of speculation that the ECB is, with the Bundesbank's blessing, baaaack.
Translated from Spiegel:
The inflation is still fear of a German subject. After all, the country experienced from 1914 to 1923 one of the most radical currency devaluations, which came in a large industrial nation ever. A rise in consumer prices is so politically sensitive still. Now, the German central bank still dares approach the subject - albeit with extreme caution.
The Bundesbank estimates that Germany will soon have an inflation rate that is above the average in the European Economic and Monetary Union. So it pushed Jens Ulbrich, who heads the economics department of the Bundesbank, at a hearing in the Finance Committee of the Bundestag, the Dow Jones news agency reported on Wednesday.
In Germany, inflation is currently lower than the average for the euro-zone. Economists expect but also that it increases soon. In collective bargaining were last achieved significantly higher wage settlements, even Germany's finance minister, Wolfgang Schäuble (CDU) warned at the weekend to significant wage increases. Does not increase productivity at the same rate, reduces the price competitiveness of Germany. Also, this would reduce the imbalances in Europe.
Naturally, since central planners are in charge, they posit that this shift to nearly one century of monetary prudence can be moderate, and will take place calmly and peacefully:
he increase would take place only from very low to a moderate level. Could be meant a transient level of about 2.5 to 2.6 percent. And yet: The announcement by the Bundesbank pursued in the scientific world with great interest. The British "Financial Times" evaluates it as a signal that the Bundesbank loosened its rigid inflation policy. The economist Carsten Brzeski of the Dutch bank ING sees it as a "major breakthrough". The Bundesbank admit the first time that Germany must take responsibility for a new balance in the euro area, he said the "Financial Times Germany" ("FTD").
Consumer prices are expected to rise for a simple reason, according to Ulbrich: Europe's politicians are increasingly trying to reduce so-called current account imbalances. With this in the broadest sense, the international flow of goods are intended. Countries in southern Europe have more imported than exported for years, while wages increased in these countries. Funding has been the high cost with new loans, so indebted to the Southern European countries more and more.
The irony is that Germany is funding the current account deficits of the rest of Europe. The fact that inflation in Germany has been stable has allowed this. Start adding inflation and things will get out of hand quickly.
But that is not the real reason for the about face in German monetary policy: what it really is getting at, is to telegraph that the Bundesbank is now most likely open to far more aggressive intervention by the ECB, whose LTRO has now failed miserably, and nothing short of outright monetization (in the primary market: the secondary market purchase program: the SMP is also a failure) will prevent the collapse of the union, especially once Greece leaves.
In other words, the stage for the world's next epic monetization episode is now being set, with a hapless Germany, dragged kicking and screaming into. And why not: just ask any central planner - "it is for their own good."