While negative real yields are currently no longer an issue for many investors, they are becoming a pressing topic once again, especially for those of us focused on building and preserving savings. The root cause of this issue is inflation.
Before we continue discussing future inflation and the emergence of negative real yields, let’s first clarify what the term “inflation” really means.
The term “inflation” is often used loosely, and different people have various interpretations of it.
In everyday language, inflation generally refers to rising prices of consumer goods—when the items you buy in stores become more expensive month after month, year after year. In other words, you get less for your money.
However, to truly understand inflation, it’s important to distinguish between its symptom and its cause.
Economically speaking, the cause of inflation is the increase in the money supply—this is what we call “monetary inflation.” The symptom of this cause is the rise in the prices of goods, also known as “goods price inflation.”
To put it simply, goods price inflation is always and everywhere a monetary phenomenon, as American economist Milton Friedman aptly put it.
However, if we want to be really precise, we should say that goods price inflation results from an increase in the money supply relative to the demand for money.
Inflation is an economic issue, especially for savers and investors, and can be downright destructive. This is true not only when inflation becomes so high that money literally loses its value, but also when inflation is relatively low yet still higher than nominal interest rates.
Here’s an example: Let’s say you earn a 2% return on your bank deposit, but inflation is 3%. In this case, your real interest rate—the inflation-adjusted interest rate—becomes minus 1% (i.e., 2% nominal interest rate minus 3% inflation). This means that the purchasing power of your bank deposit declines by 1% annually. And don’t forget capital gains taxes, which are applied to nominal returns, could further exacerbate your losses.
Now, you may ask: Who is responsible for “inflation as a monetary phenomenon”?
The answer is: Central banks. They have the monopoly on creating money. Central banks issue central bank money, and based on this, commercial banks are allowed to create commercial bank money.
And now, you see why it’s nonsensical when people claim that central banks (or their governing bodies) are “fighting inflation.”
In reality, central banks never fight inflation—they create it. Sometimes they create more inflation, sometimes less, but they never fight inflation (i.e., the rise in goods prices driven by an increase in the money supply).
Looking at the euro area, one might argue that the money supply grew only by 4% in February 2025 compared to the previous year.
This doesn’t seem excessively high, and bank loans—through which new money is created—were growing at only about 2%. So, how could inflation be on the rise, especially with no significant economic upswing in sight?
This argument does have some merit. However, looking ahead, there are strong reasons to expect a massive increase in public debt across euro area countries. This debt won’t just be used to purchase new military equipment, but also to prop up the increasingly unsustainable “welfare state” and support failing political structures.
To achieve this, euro area states—especially the largest ones—will issue large amounts of new government bonds. These bonds will most likely be purchased by the European Central Bank (ECB). At the same time, the ECB will likely lower interest rates and suppress bond yields to artificially low levels.
The newly created money will be spent on social transfers, government contracts, and other political activities.
It’s well-known that politicians tend to spend money on projects with little or no productivity gains. As a result, the increase in the money supply, combined with government spending, will inevitably push up goods prices, causing inflation to rise.
Let’s put things into perspective with a few numbers.
If government deficits in the euro area are around 5% of GDP, and the ECB purchases newly issued bonds with newly created money, the money supply could increase by approximately 800 billion euros. This would represent an annual growth rate of the M3 money supply of about 5%. In addition, the money supply would increase as a result of private sector bank borrowing.
Altogether, this could push inflation in the euro area to around 4% or more. If the ECB keeps long-term interest rates at around 3%, the real interest rate would drop to minus 1% (3% nominal interest rate minus 4% inflation). This means that states can reduce their real debt at the expense of creditors—those who hold money, savers, and investors.
For short-term bonds and bank deposits, which typically offer lower interest rates, the expropriation through negative real interest rates would be even more severe.
In summary, this situation amounts to what’s known as “Financial Repression.”
But you might be thinking: Didn’t we already experience negative interest rates recently?
You’re correct. From the end of 2018 to the end of 2020, for example, the nominal yield on the 10-year German government bond was negative.
At that time, inflation remained relatively tame until mid-2021, so it wasn’t rising inflation that caused the real interest rate to go negative. Rather, it was the falling nominal interest rates. Later, inflation surged, largely due to the ECB’s 25% increase in the M3 money stock, and increased inflation drove real interest rates even further into negative territory.
Looking ahead, however, the situation will likely be different. Inflation will be the driving force behind negative real interest rates. Here’s why:
In the current environment, the ECB will find it challenging to push nominal market interest rates back to or below zero. Bond yields worldwide have risen significantly, and euro-denominated bonds need to offer sufficiently attractive interest rates to maintain investor interest.
Therefore, the ECB is likely to orchestrate a low but positive capital market interest rate while ensuring higher inflation. This would push nominal interest rates below the rate of inflation, causing real interest rates to become negative, with borrowers benefiting at the expense of savers and bondholders.
The financial repression resulting from rising inflation will have far-reaching economic and social consequences.
Negative real interest rates will continue to transform euro area economies into more command-and-control systems, where states dictate production, consumption, and every aspect of economic life. This erodes the remaining freedoms of citizens and entrepreneurs, making the state increasingly omnipotent.
The signs of this shift are already visible. Consider, for example, the European Union’s blatant move to seize citizens’ savings to finance politically desired expenditures.
The euro area is slipping into a highly precarious situation: States can no longer fund their insatiable hunger for money through regular tax revenues alone. As a result, politicians are relying more on debt financing. Even so, the end of the line is in sight.
Private investors buy euro government bonds because they know the ECB will not allow euro area countries to default. The ECB will continue supporting them with newly created euros when needed. To keep debt affordable for financially strained states, the ECB will drive down interest rates artificially.
This brings us to the current situation: The ECB is expanding the money supply by purchasing government debt (that is, it is running the electronic printing press), inflation is rising, and nominal bond yields remain artificially low—resulting in negative real interest rates for savers and investors.
If you want to learn, please visit Dr. Polleit’s BOOM & BUST REPORT website at www.boombustreport.com.
