Dorgan

Nomura's Richard Koo destroys the backbone of the modern central bankers only tool in the tool-box in his latest paper. "As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down ...The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limitmed impact... In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more."

Hedge funds, allegations, and arm-twisting. But it beats the alternative....

And Monday, it became official.

We recently discussed Guggenheim's 'awe-full' charts of the level of central bank intervention from which they noted that the Fed could lose 200 billion US$, when inflation comes back again. Interest rates would increase by 100 basis points and the US central bank would be bankrupt according to US-GAAP. We explain in this post the differences between money printing as for the Swiss National Bank (SNB), the ECB and  the Fed. We show the risks the central banks run when they increase money supply, when they “print”. As opposed to the ECB, the SNB only buys high-quality assets, mostly German and French government bonds. However, for the SNB the assets are in foreign currencies, for the big part they are denominated in euros. Further Fed quantitative easing drives the demand for gold and the correlated Swiss francs upwards.  Sooner or later this will pump more American money into the Swiss economy and will raise Swiss inflation. For the SNB these two are the Mephistos: Bernanke and Draghi, the ones who promise easy life based on printed money.

Even in the unlikely case of a fiscal union, the conflict “Draghi against Weidmann”, between the ECB and the Bundesbank will continue for years. The ECB mandate and many european inflation figures do not allow for excessive ECB rate cuts or for state financing via the printing press, but Draghi wants to help his struggling home country.

“The extent of tax fraud by the Swiss has no numbers”

They could have been soul mates

“Breakup of the Eurozone”: a concept that is taking on a life of its own

There are already three former European central bankers who criticize more or less openly the European Central Bank (ECB). All these older central bankers experienced the inflationary periods in the 1970s in detail, whereas the younger ones seem not to grasp what inflation means. Modern central bankers seem to think that monetary inflation will not lead to price inflation in the long-term. This might be true in countries where asset prices need to de-leverage after the bust of real-estate bubbles. But it is certainly not true in states like Germany, Finland or Switzerland, that did not have a real-estate bubble till 2008. With current low employment and the aging population, qualified personnel who speaks the local language  will get rare. PIMCO’s Bill Gross might be right saying that soon employees want to get a part of the cake and not only the stock holders. This essentially implies wage inflation, the enemy of the 1970s.

How can such a small country blow through so much money?

Because Everyone from the Ultra-Rich to Illegal Immigrants Pay Nothing

Nearly full employment in all the cited developed economies except the US shows that the deflationary environment of the recent months is only temporary. Deflation is rather an effect of the recent strong fall in commodity prices. No wonder that the Fed is still reluctant to ease conditions; they saw the opposite temporary commodity price movements last year. We do neither expect a global inflation nor a deflation scenario but a balance sheet recession in many countries but still an increase of wages and therefore a very slow global growth in both developed and developing countries and continuing disinflation (see chart of Ashraf Alaidi to the left). CPIs will look soon similar for all developed countries, with the consequence that the currencies of the most secure and effective countries (measured in terms of trade balance and current accounts) will appreciate. These are for us e.g. Japan, Switzerland, Singapore and partially Sweden and Norway. The overvalued currencies with weaker trade balances like the Kiwi and Aussie must depreciate.

Why Germany won’t blink.

One week to solve all problems, or else....

The most recent money supply data from the Swiss National Bank (SNB) has shown increases of huge amounts. As compared with its loss of 19 bln. francs in 2010 (3% percent of the Swiss GDP), the central bank printed tremendous 17.3 bln. in the week ending in June 1st and 13 bln. in the one ending in May 25th. These numbers were not seen since August 2011 when the SNB increased money supply by 50 bln and 40 bln per week buying the EUR/CHF at rates between 1.00 and 1.13. Now, however they are buying at 1.20 and are risking extreme losses, especially because many other central banks are dumping euros.