BETTER FINANCE: Background: "EU Pensions seem doomed with ‘Financial Repression’ as the only game in town"
11 October 2022
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.
BETTER FINANCE
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