Local elections are around the corner here in the Netherlands (next week basically), and the campaign is in full swing, with different slogans or political platforms on display. Some of the things that are now in the news or in the political statements are inflation and housing problem. Those two are however strongly related, even if too little people are actually connecting the dots. And if the housing problem is prone to happen at any time here in the Netherlands due to the size aspect of the country, the inflation is a big trouble for the whole Eurozone.
First of all, the Netherlands doesn't control his own currency since it has none. It's running on euros, and these are managed by some guys in Frankfurt, called the ECB (European Central Bank). They're similar to the FED in the United States, at least in the stupidity of their monetary policies. But about this, later in the post.
About the inflation
Prices increases are now extremely visible for the regular Joe&Jane. Initially they were blamed on the supply chain issues, caused by COVID and related lockdowns, and now on the ongoing war between Russia and Ukraine. How visible you might ask? Something like this:
Green party wants emergency law to freeze energy prices amid Russia-Ukraine war
But the rising inflation and gas prices are more than many Dutch households can bear, he warned. "That is why the Cabinet must act now and ensure that the bill for our solidarity with Ukraine does not end up paid by the people who are already struggling."
Cabinet not in favor of excise duty reduction for fuel
The suggested retail price of petrol is approaching two euros and 35 cents. Kaag noted the Cabinet is “hugely concerned” about the high inflation and soaring energy prices in the Netherlands, according to NOS.
However, Kaag is not in favor of a reduction in the 21 percent VAT the government levies on petrol and diesel. She explained this would lead to budget cuts in other essential areas, which could ultimately prove unhelpful to people struggling financially.
Freezing the prices, as any other solid socialistic measure, has the nasty effect of creating shortages, generating bankruptcies of the companies involved (forced to sell at a loss) and creating a parallel black market (that will reflect the real price of the goods).
On the highways, the price is already reaching 2.50€/liter for the regular Premium 95 gasoline. For the Americans readers, this means around 12.5 USD/gallon.
What the government fails to notice, is that for the kWh (currently priced around 0.35-0.40€), 37% of the final price is actually taxes (VAT, green taxes, etc). For the natural gas, a m3 (currently priced around 1.46€) a whooping 48% of the price is taxes (again, VAT, green taxes, etc).
So it's nice to justify everything based on the war in Ukraine, but the price levels were unnecessary high to start with, and most of this is the result of heavy taxation and forced pushed to the green energy, who created in the process even more poverty and pain.
Obviously, when you have an increase on top of the already high energy prices, the whole economy (services and industry) are going to be affected somehow, since they are all based on some form of energy. Food is already one of the first to go higher, with basics as sunflower oil getting a direct increase of around 40%!
The inflation genie is out of the bottle also in the housing market. You can find more information on this blog about the increases, but the bottom line is that the houses basically double their prices in the last 6-7 years. And the housing market is running wild at this moment, with sales taking place in a couple of days.
Who can and what can be done about this?
Well, theoretically these guys:
With an inflation running hot at around 8% (and going higher by month), it's obviously that ECB is doing a really lousy job "keeping the prices stable" and preserving the value of the money. Similar to the FED, they've been chasing an utopic threshold of 2% inflation; unfortunately, they've been pushing the insanity even further and at this moment, the rate of the deposit facility is -0.50%. If you haven't noticed the minus sign in front, yes, that's a NEGATIVE half a point. This led eventually to commercial banks to charge negative interest rate on the deposits (currently over 100k per account, but that's probably expected to change soon).
In November 2021, the ECB balance sheet was €8.44 trillion (€4.70 pre-Covid). Mountains of euros were thrown at the markets:
The ECB bought 134.7 billion euros ($160 billion) worth of government bonds issued by Italy, Germany, France and Spain across its stimulus schemes in June and July, compared to a net supply of just 89 billion euros from those countries, according to UniCredit estimates from July 19.
And here:
Bond buying under its 1.85 trillion euros ($2.19 trillion) Pandemic Emergency Purchase Programme, or PEPP, which is due to end in March 2022, will be cut next quarter as the scheme winds down.
However, bond buys under the Asset Purchase Programme, or APP, will be ramped up to serve as a quantitative easing bridge through the end of the PEPP, having continued at a monthly pace of 20 billion euros in conjunction with the PEPP until now.
So what would be a natural response from any Central Bank to fight the inflation? Well, raising the interest rate above the inflation rate would be a proper answer.
And why they will not do it
ECB is not even thinking of "raising" the interest rate. They're playing the waiting game, even if across the pond for example, this "transitory inflation" didn't play that well at all with the FED. And even if they will "raise" the interest rate, that will still remain in the negative territory! How they're supposed to preserve the value of the euro when the inflation rate is so many times higher than their pathetic interest rate? They're not.
A raise is not possible from a variety of reasons: a lot of government are actually paying their social obligations and expenses with borrowed money from the ECB (printed out of the thin air, of course). Raising the interest rate, will make rolling the debt even more difficult, demanding even more amounts of money to cover it. That will generate even more inflation.
States as Italy, Spain, Greece, Portugal, are aware that once the ECB is not buying anymore (or not so much) their debt, they're basically bankrupt and their borrowing cost will skyrocket on the free market (the same market that is heavily influenced now by the ECB). Once those states are bankrupt, the euro is history. Let's not forget that the euro is a common currency, and nobody in the Eurozone can insulate itself from the downfall.
Even without these aspect, raising interest rate will raise the mortgage rates. This will calm down the housing market by its own implosion, making future credit more expensive. But the downfall of the market will have bigger consequences across the economy, and even the current mortgage holders will be slapped in the face by the rising costs. Stagflation will quickly be in place.
So, can in the end the local Dutch politicians do anything about the inflation and housing market? No that much, unless you count throwing even more euros in some sort of subsidies, thus generating even more inflation. The Netherlands doesn't control its currency anymore and his economy is affected directly by a (foreign) central bank. And the fate of the euro, at least in terms of value, is hold by the weakest countries in the chain.
Is not the war rising the prices now. It's the years of reckless monetary policies of the ECB (and in the same bucket, FED, BOJ, etc). It's the years of climate change fear mongering, that led to a forced and unsustainable migration to so called, green energy.
Maybe the war will be the needle that will prick the bubble. This shall be seen.
Meanwhile, the gold and oil are priced higher.
