5. Deflationary Tendencies After the 2008 Financial Crisis, the Covid-19 Pandemic and Stagflation After the Energy Shock

It should be noted that neoclassical economists and policy makers following this approach frequently argue that real wages should be cut to reduce unemployment and at the same time argue nominal wages should not increase because of inflationary pressure. Such argumentation is, of course, inconsistent.

Financial system rescue measures took place in particular in 2009. Government-funded purchases of bank assets amounted to 1.6%, and bank recapitalisations to 3.1% of GDP in that year (Kollmann et al. 2012).

Already in December 2007, the Fed instituted the Term Auction Facility (TAF) to address disruptions in money markets; in March 2008, it created the Term Securities Lending Facility (TSLF), which enabled primary dealers to borrow U.S. Treasury securities against their hard-to-sell collaterals; in March 2008, it created the Primary Dealer Credit Facility (PDCF) to provide primary dealers with collateralised cash loans over night; in November 2008, the Term Asset-Backed Securities Loan Facility (TALF) was created trying to reopen and stabilise markets for securities; in the framework of TALF and the Troubled Asset Relief Program (TARP), the Fed together with the Treasury offered 200 billion US dollars for interventions; in September 2008, the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) was established to provide liquidity to money market mutual funds; in October 2008, the Fed authorised the Commercial Paper Funding Facility (CPFF) to create a limited liability company CPFF LLC to buy unsecured and asset-backed commercial paper; the creation of the Money Market Investor Funding Facility (MMIFF) was announced in October 2008 to purchase short-term debt from money market mutual funds; in November 2008, the Fed announced that it would purchase government-sponsored debt and mortgage-backed securities; in March 2009, the amounts of purchased government-sponsored debt and mortgage-backed securities were increased.

Among other things, the Troika has forced Greece into a wave of privatisation. Since 2011, almost all major ports and airports in Greece have been sold to foreign companies. In 2016, after several previous steps, the Chinese state-owned group COSCO secured a two-thirds majority stake in the port of Piraeus, one of the most important transshipment ports in Europe (Bali 2022).

Other central banks, particularly the ECB and the People’s Bank of China, also used the instrument of swap agreements, however to a much smaller extent.

The Bank of Japan’s balance sheet reached a spectacular 130% of GDP after the Covid-19 crisis (National Bank of Greece 2023).

The ratio of external debt to total export earnings in the group of low- and middle-income countries was 80% in 2010 and 103% in 2020, the ratio of debt service to total exports was 9% in 2010 and 14% in 2021, and the ratio of foreign reserves to external debt stock was 122% in 2010 and 69% in 2021. The increase in foreign debt stock to GDP and the risk of external over-indebtedness was particularly dramatic in Latin America and the Caribbean, the Middle East and North Africa, and sub-Saharan Africa (World Bank 2022).

This is illustrated by the following example. The central bank rescues a troubled bank and gives it a loan of 500 million in the domestic currency. The bank now settles its debts with other banks. The latter are now swimming in liquidity, but do not want to lend to the private sector. In this case they hold the 500 million as excess reserves in central bank money. The same effect exists when the public withdraws money from the troubled bank and increases deposits in other banks. In this case monetary wealth in the private sector also does not increase. In fact, after 2008, excess reserves in the banking system increased sharply (cf. Heine and Herr 2021).

If the central bank finances budget deficits and does not want private monetary wealth in the public sector to increase, it can try to neutralize the increase in monetary wealth in the private sector by issuing its own securities. The central bank can also sell foreign currency reserves to reduce domestic monetary wealth held by the public, for example to strengthen the currency. However, there are limits to such sterilisation policies (cf. the analysis of the German hyperinflation in Chap. 2).

The rise in energy and food prices was also certainly driven by speculation. Breman and Storm (2023) calculate that a substantial part of the price increase of energy was driven by speculation.

In March 2023, several US banks experienced problems and needed help from the Fed. In Switzerland, Credit-Suisse, the second largest Swiss bank and one of the thirty largest banks in the world, with systemic importance, ran into difficulties. Only a quick takeover of Credit-Suisse by UBS, the largest Swiss bank which is also systemically important, and government support stabilised the situation (Herr 2023a).

The following increases in insolvencies have been forecast for 2023: US 49%, France 41%, United Kingdom 16%, Germany 22%, Italy 24%. Globally, an increase of 21% is expected in 2023 and a further increase of 4% in 2024 (Reinsurance News 2023).

Here, the state took over gas and heating costs in full for December 2022. From January 2023, the state then assumed costs for gas above 12 cents per kilowatt hour for 80% of the previous year’s consumption until April 2024. Similar arrangements apply to district heating and electricity.

In the governing coalition in Germany between the Social Democrats, the Greens and the Free Democrats that came into office at the end of 2021, the Free Democrats in particular, who provide the finance minister, stand for strict compliance with the Debt Break.

Let us take the latest OECD Figs. (2023): public investment as a share of GDP was 11.8% in Germany in 2022, 13.0% in the EMU, 15.5% in the US, and 18.0% in the United Kingdom.