Edin Mujagic: "Central banks have put credibility at risk"

Central banks have put their credibility on the line by not pursuing unambiguous policies. For years, inflation had to go up, but now that it is far above target, they are not giving in. The Federal Reserve came up with a marginal interest rate hike, while the ECB built its bond-buying program slightly. That is far too little and far too late, according to monetary economist Edin Mujagic in an interview with Holland Gold. He believes that these times call for a well-diversified investment portfolio, in which gold and silver also deserve a place.

Central banks are now hiding behind the fact that they cannot fight the causes of high inflation. They can't solve logistical problems, nor can they do anything about the high prices of energy and raw materials. This is despite the fact that they have had sufficient opportunities to adjust monetary policy and raise interest rates in recent years. The fact that the ECB and the Federal Reserve have not seized that opportunity makes them less and less credible, Mujagic said.

High inflation and low interest rates

Inflation is currently very high, while interest rates are still at an all-time low. "That is already a form of financial repression, because people then lose purchasing power", according to the monetary economist. He fears that this will undermine confidence in the euro among the general public. The central bank must fear not only persistently high inflation as a result of a wage-price spiral, but also a loss of support among the population.

"This can manifest itself in a wage-price spiral, but it can also manifest itself in people's voting behavior. So that could also mean that people who see a lot of benefit in having a common currency are now so angry that they no longer like the euro."

Buy-back program

Mujagic notes that the bar for large-scale bond purchases is now incredibly low. What was once unconventional monetary policy is now part of the normal toolbox of central banks. And it doesn't speak in favor of central banks that they continue to do it for so long.

"What many people also don't know is that the central bank reinvests the proceeds of old bonds entirely in new bonds. Those reinvestments are already €30 billion a month, because the ECB has already bought so much. In fact, we are talking about €70 billion a month that is being thrown out in that bond market. I don't know how you can put this under tighter monetary policy."

Central banks are disrupting the game between supply and demand with their asset purchase programme. For some time, according to Mujagic, the policy was defensible, but not anymore. By the week, the story is getting worse due to high inflation. The capital market will react to central banks' intention to taper their asset purchase programme, which means that interest rates will eventually rise again. This is reinforced by higher inflation expectations.

New turning point?

The year 2022 may be another turning point in the international monetary and financial system, just as 1971 was a turning point. Sanction measures such as shutting down banks from SWIFT have been used before, but the blocking of reserves of the Russian central bank is unprecedented. It's 'not done' in the world of central banks. This is a serious turning point, because the dollar is now really being used as a weapon. Central banks can no longer rely on monetary immunity, holding dollar reserves has become a risk.

What is the solution?

The market is now addicted to zero percent interest. Because interest rates have been low for so long, debts continue to rise and governments no longer have an incentive to cut spending. The level of interest rates at which countries get into trouble is therefore getting lower and lower. Due to the high level of debt, risks are building up in the economy.

Mujagic expects that there will come a time when we will have to write off debt. An undesirable outcome, because it rewards irresponsible behavior and punishes responsible behavior. With low interest rates, central banks are sending a signal to the future that people should borrow. If the problem really gets that big, they will solve it through a write-off of debt.

As an investor, Mujagic says it remains important to diversify well, because that is the safest strategy in the long term. However, he does believe that people should add gold and silver to their investment portfolio. Depending on age and risk profile, this can be up to 10% of the assets. "The uncertainty is now so great that you have to take out inflation insurance. Putting everything in gold and silver is also not wise, because then you have no spread. Even the present time is no guarantee that gold and silver will eventually do better."

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Edin Mujagic: "Central banks have put credibility at risk"

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.