By Hans Bentzien
FRANKFURT (Dow Jones) — The European Central Bank (ECB) leaves its monetary policy according to Thomas Mayer, founding director of the Flossbach of Storch Research Institute Cologne, dictated by the financial needs of the euro area governments and is also based on an outdated scientific concept. At an event organized by the European Finance Forum (EFF), Mayer said: “I see the euro on the way to the Italian lira.” The lira had lost 82 percent of its value by the time it was merged into the euro. “I envision something similar for the euro.” The euro is a “genuine successor to the Italian lira”.
Mayer, who has also worked at the Kiel Institute for the World Economy (IfW), the International Monetary Fund (IMF) and Goldman Sachs over the past few decades, accuses the ECB of relying on a (Keynesian) scientific paradigm that is in decline be. “It’s good for those who want to sell government bonds,” he said, adding, “It’s not productive and has to be fought down in the academic field.” And that in turn will be associated with personnel changes.
Mayer sees the world – despite some differences – in the same situation as during the first oil price shock in the 1970s: “Many say: Everything is different – but that is an assumption of knowledge.” He explains the currently high inflation with the quantity theory: If the money supply rises faster than the economic performance, then the prices rise – “that’s the adult education center in Sauerland”. According to Mayer, the same applies to the price of oil: if the demand for oil rises but the supply remains low, then the price rises.
In the 1970s, when the dollar was unpegged from gold, the US Federal Reserve responded to double-digit inflation by raising interest rates from 5 percent to 20 percent. (At the Bundesbank it was over 7 percent.) The result was two recessions that the new Fed Chairman Paul Volcker knowingly triggered after his predecessor Arthur F. Burns left. Mayer: “This fiat money system was saved again in an unbelievable effort.”
According to Mayer, the question now is: “How far do you go now?”. For the sovereign money advocate, “the dollar is the one-eyed man among the blind” who has “upside potential.” However, Mayer is not convinced that the Fed will plunge the US into another recession. “The real fed funds rate (down 7.67 percent) is brutally negative, which speaks against a recession,” he said. This interest rate was always positive before recessions.
Mayer is pessimistic about the euro: “The euro is a shaky thing, we might see parity at the end of the year.” He accuses the ECB of having bowed to the “fiscal dominance” of the states. “We gave up the independence of the central bank. It’s back to what it used to be: a state financier,” he says.
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DJG/hab/apo
(END) Dow Jones Newswires
June 14, 2022 06:52 ET (10:52 GMT)