11 October 2022

BETTER FINANCE: Background: "EU Pensions seem doomed with ‘Financial Repression’ as the only game in town"

Eurozone inflation mushroomed from 3.4% to 10% in one year, further deepening Europe’s cost-of-living crisis, yet the best the European Central Bank (ECB) could muster is a late and timid hike of interest rate from 0 to 0.75%. Financial repression policies in place since the crises of 2008 and 2009 are being tightened further in an effort by governments and central banks to address the ballooning debts of the Eurozone economies, with seemingly no consideration for European citizens and the destruction of the purchasing power of their pension savings. So, why does ‘Financial Repression’ remain the only game in town?

INFLATION MYTHBUSTERS

• Smoke & Mirrors | More than a reaction to short-term economic and political triggers, inflation is a monetary phenomenon, currently enabled by the unprecedented increase of the money supply by the ECB: its balance sheet tripled between 2015-2021 to reach €8.6 trillion.
• From risk to reality | Inflation is generally presented as a risk, although its long-term and persistent presence proves it to be a reality: except for 2014 and 2017, the last three decades have seen inflation eroding the real value of income and savings year after year.
• Not a negligible amount | Maybe we generally don’t notice it, but over the last 30 years, inflation halved the purchasing power of money. In other words, it’s not a phenomenon we can easily ignore or absorb.
• No fair play | National fiscal policies levy tax on nominal investment profits, which in many cases are fictitious given that, in real terms, these are negative, and thus shouldn’t be taxed. This phenomenon intensifies the negative effects of inflation on savings.
• Unknown & invisible enemy | Non-professional savers and investors are fully unaware of the effects inflation has on savings and investments, mostly because inflation is swept under the carpet and veiled behind cognitive biases. Reporting requirements, especially those mandated by EU law, do not require any kind of disclosure or warning that factor in inflation. The obligatory risk indicators do not take inflation risk into account, nor do the prominent warnings on investment products include inflation, and past performance reporting (if this will even remain a thing) never disclosed real returns. At the same time, households are subject to two biases: money illusion - the tendency to think of currency in nominal terms, as if its value will never decrease - and exponential growth.

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