Everything seems to be going great: vaccines enable western nations to slowly return to normal, having a positive effect on the economy. But is this the case? And will the current situation turn out to be stable? In a news article from De Telegraaf, Professor of Monetary Economics at Erasmus School of Economics Casper de Vries elaborates on the policy of the central banks.
Rising inflation
In July, the inflation rate has risen to 2.2%, a rate higher than the pre-arranged target of 2%. Even though central banks seem to think that this will only be the case in the short run, De Vries makes the following remark: ‘during the pandemic, we constrainedly spent less money. Now, we want to go on holiday, go out eating, and the likes. Because of this demand, prices rise, and inflation is getting higher in comparison with the pre-pandemic situation’. However, central banks have announced to continue buying debt of governments.
Low interest rates
This, in combination with low or even negative interest rates, can ultimately have devastating effects. Even countries like Greece, with a debt twice as big as its GDP, can acquire money against very favourable terms. De Vries: ‘some economists state that a country is easily able to have a national debt as big as its GDP. Everything seems fine, until the market starts to doubt whether a country can eventually pay back its debts. At that moment, we get what we have seen in Greece: write-offs on state debt, a stagnating economy and roaring unemployment. That on a much bigger scale’.
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You can download the full article from De Telegraaf, 31 July 2021, above.
