Interview: Clemens Fuest: „Es droht eine fortgesetzte Erosion des Vertrauens“

Interview with Clemens Fuest reveals a growing erosion of trust in asset markets, signaling the end of the low-interest era sparked by the financial crisis. Factors such as high public and private credit demand, supply shortages in energy and other goods, and the AI boom are driving both inflation and interest rates up. The rise in real interest rates, however, is less than the nominal increase due to inflation.

The sustainability of current debt policies is in question, as trust is eroding. The situation in Europe may lead to a new Euro crisis, this time centered around France. The ECB will face a dilemma between fighting inflation and supporting heavily indebted states, the latter being forbidden. Ultimately, the ECB will likely prioritize stabilizing fiscal finances over inflation control.

Looking at the U.S., the debt situation is also at risk of continued erosion of trust. Unlike in Europe, the U.S. is not part of a currency union, giving the Federal Reserve more autonomy in monetary policy. However, President Biden's pressure may push the Fed to lower interest rates despite high inflation. The differing US debt dynamics compared to Europe highlight potential conflicts between fiscal and monetary policies.

It is quite probable that governments may resort to "financial repression" to overcome the debt crisis, such as using central bank influence, regulatory mandates for banks and insurers, or capital controls. Both the U.S. and Europe face challenges, but the US may have more options, including higher and more volatile inflation rates and financial repression in the form of regulations pushing investors towards US Treasury bonds.