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The ECB's Lunatic Full Monty Treatment
Submitted by Pater Tenebrarum via Acting-Man blog,
Not Quite Right in the Head?
The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.
Photo credit: Michael Probst
We know of course that central banks are the major income source for many of today’s macro-economists, so it is in their own interest not to make any impolitic noises about these central planning institutions and their activities. Besides, most Western economists have not exactly covered themselves with glory back when the old Soviet Union still existed. Even in the late 1980s, Über-Keynesian Alan Blinder for instance still remarked that the question was not whether we should follow its example and adopt socialism, but rather how much of it we should adopt.
The recent ECB announcement detailing its new “QE” program once again confirms though that there is nothing even remotely “scientific” about what these planners are doing. Common sense doesn’t seem to play any discernible role either. Below are the 10-year government bond yields of Italy and Spain. These are actually among the higher bond yields in Europe right now.
Italy’s 10 year government bond yield is now below 1.3% – click to enlarge.
Spain’s 10-year yield is also below 1.3% – click to enlarge.
Leaving for the moment aside how sensible it is for the bond yields of virtually insolvent governments mired in “debt trap” dynamics to trade at less than 1.3%, one must wonder: what can possibly be gained by pushing them even lower? Does this make any sense whatsoever?
Meanwhile, the ECB let it be known that it wouldn’t buy any bonds with a negative yield-to-maturity exceeding 20 basis points – the level its negative deposit rate currently inhabits as well. What a relief! What makes just as little sense is that the economic outlook presented by Mr. Draghi on occasion of his press conference was actually quite upbeat.
To summarize: yields are at record lows, with about €2 trillion in European government bonds sporting negative yields to maturity. The economic outlook is said to be good. The current slightly negative HICP rate is held to be a transitory phenomenon (it very likely will be). Needless to say, the arbitrary 2% target for “price inflation” makes absolutely no sense anyway. Not a single iota of wealth can be created by pushing prices up. Last but certainly not least, year-on-year money supply growth in the euro area has soared into double digits recently.
And the conclusion from all this is that the central bank needs to boost its balance sheet by €1 trillion with a massive debt monetization program? Are these people on drugs? If not, then they should perhaps see a shrink. Perhaps the cupboards of the monetary bureaucrats are short a few plates and in need of a little pharmacological fine-tuning. Just saying.
Money supply growth in the euro area is going “parabolic” of late. And it’s still not enough? – click to enlarge.
The ECB’s balance sheet remains below the levels of 2012 as banks have repaid LTRO funds. However, the central bank balance sheet doesn’t necessarily have to grow for the money supply to soar – there is only a very tenuous (or rather, non-existent) correlation between the money supply and bank reserves. Note that with required reserves in the euro area at a mere 1%, commercial banks could in theory lever up every euro they receive in deposits by a factor of 100 and it would be perfectly fine with the ECB (chart via the WSJ) – click to enlarge.
Let’s Do More of What Isn’t Working
As you can see above, the only datum that hasn’t yet attained the lofty heights of full Monty lunacy is the ECB’s own balance sheet – however, that has obviously not kept the banks from vastly expanding the amount of fiduciary media in the economy. The ECB’s upcoming intervention should result in an acceleration in euro area money supply growth, quite possibly pushing it to new record highs in terms of the yearly rate of change.
The WSJ has has also published a summary of European “growth” (this is to say, the change rate of GDP, which is generally referred to as growth, even though it tells us almost nothing about whether or not material prosperity is actually increasing) and “inflation” (not of the money supply, but depicting the change in consumer prices). What this chart shows is that unprecedented monetary pumping and ZIRP/NIRP have had none of the effects predicted by the central planners so far. Even if they had, it would be no reason to rejoice.
Euro-land GDP growth rates and consumer price inflation rates. No dice as of yet – click to enlarge.
To briefly explain the dismissive remark above and the annotations we have added to this chart: it seems possible that measures of economic activity such as GDP growth will improve somewhat in light of the recent lift-off in money supply growth. However, this will only indicate that new capital malinvestment has been set into train. It should be obvious that society at large cannot possibly become any wealthier just because more money is about to be printed. If that were the case, the economies of Venezuela, Zimbabwe and Iran would be the envy of the world.
Moreover, if the ECB’s “inflation target” is reached (a target doesn’t make even the slightest economic sense), it will actually actually harm European consumers. Their incomes and savings will then decline in real terms, i.e., they will become even poorer. They are already losing big due to the recent enormous decline in the euro’s exchange value. As Ludwig von Mises noted with regard to the devaluation of exchange rates:
“The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare.
In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”
(emphasis added)
In short, the entire citizenry of the euro area has already become poorer due to the efforts of the ECB. The explicit goal of the central bank is now to make them even more so. What is the point of such a policy?
There is of course a point to this seeming lunacy: it is all done to support the profligate governments of Europe’s welfare states and keep the formation of the socialistic super-state in Europe on track. Whether this is seen as good or bad by the average citizen is not even up for debate: it is simply what the political and bureaucratic elites have long ago decided is good for the citizenry, since they think they know best. One might say that it is up to said citizens to elect someone who would do things differently, but that runs into the practical problem that many, even most, of the political groups offering an alternative are even bigger etatistes than the current elite. Whether they are of the socialist or the nationalist (more precisely, national socialist) variety matters little in this context. One would have to expect them to implement even more central economic planning.
Conclusion:
The ECB may succeed in increasing economic activity and prices in Europe (especially the latter) by stepping up the pace of monetary pumping even more. However, this will not create any new wealth and will ultimately only sow the seeds of the next crisis. Since many economic regions in Europe are already very poor structural shape, it is also possible that that not even the illusion of economic growth can be created anymore. Bondholders should however be happy, as they can now unload the debt of governments that are up to their eyebrows in debt that will never be repaid in real terms on a buyer with unlimited buying power.
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They are trying to lower the Euro to match the Ruble so they can sell to Russia again.
The US has masterfully destroyed the European economy. When you got "friends" like the US, who needs enemies.
The ECB assets declined about 1/3, to 2 tn. Gold: (1900 / 3) x 2 = 1267!
http://inflation.us/gold-continues-to-follow-ecb-balance-sheet-extremely...
And more you owe them, the more they know they are right in their beliefs, they just look at the balance sheet, do the numbers, and scold you behind your back for owing, and not paying what's rightfully theirs, and then they don't feel bad about going to war over it, go figure.
I can finally say I have stared the DEVIL right in the EYES.
How does that song go, '....he has golda meyers eyes..'
I couldn't bother my ass reading this article. I am grateful for the great pic of Mario as I happened to pick up a shitload of new ammo today and now have a new target image
PS - target image means a paper image used to shoot at - not the actual image depicted. Gotta go - someone knocking at the door.....
Tyler, why was the previous article pulled?
I wanted to post this:
Nigeria’s militant Islamist group Boko Haram has pledged allegiance to Islamic State, which rules a self-declared caliphate in parts of Iraq and Syria, according to a video posted online on Saturday.
“We announce our allegiance to the Caliph ... and will hear and obey in times of difficulty and prosperity,” read an English-language translation of the video broadcast in Arabic that purported to be from the Nigerian militant group. The pledge of allegiance was attributed to Boko Haram leader Abubakar Shekau.
The video script identified the Caliph as Ibrahim ibn Awad ibn Ibrahim al-Awad al-Qurashi, who is better known as Abu Bakr al-Baghdadi, the leader of Islamic State and self-proclaimed caliph of the Muslim world. Baghdadi has already accepted pledges of allegiance from other jihadist groups in the Middle East, Afghanistan, Pakistan and north Africa.
Boko Haram has been waging a six-year military campaign to carve out an Islamic state in northern Nigeria.
http://www.theguardian.com/world/2015/mar/07/boko-haram-suicide-bombers-...
QE = WTM...wealth transfer mechanixm, intergenerational and targetted to largest existing holders of assets
Will these cunts just shut the fuck up and point out the real problem? The reason gov does QE is to enrich speculators and bankers who buy their campaigns. End of story. Enough with this "Oh they are so ignorant, it will never work!" No shit, they know that, I know that, you know that, whos the idiot? The person proclaiming ignorance on the part of the central bank.
Arrest that creature. Lock it up in prison. The sooner the better.
I read the conclusion. Money printing doesn't create wealth. WOW Either this is a ZH article from 10 years back when people here were getting up to speed or this belongs on the MSM. Tyler who let this Pater person pissed in our swimming pool?
It is NOT possible to have any rational public debates about any important political issues, because there is almost nothing but organized crime surrounded by controlled opposition ...
Acting Mans blogger Pater Tenebrarum (for those who don't follow the background of folk), has a history of being rational.
I believe he's a friend of Mish, certainly of the same economic/financial philosophy mold.
So when he asks these rhetorical questions
'one must wonder: what can possibly be gained by pushing yields even lower? Does this make any sense whatsoever?'
... I have to wonder exactly who he thinks his audience is. Perhaps those still not divorced from the Matrix. I see many bloggers out there with this approach. Actually calling out the emperor for wearing no clothes would be too much, too soon. And so they allude that maybe the emperors clothes aren't covering as much as they should.
QE in the EU is just Japan passing the baton to Europe. The Fed had it, passed it to Japan, now it's the EUs turn.
(We know the CBs meet quarterly in Basel, they have a long and sordid history of acting in unison e.g. The Fed lowering rates in the later '20s to cover for Englands overpricing the pound to gold peg after WW1).
Yes,Yes,Yes, QE supports insolvent banks,accentuates income disparity, promotes bubbles. etc. We know that. Tell us something we don't know.
Next blogger who spends his post telling us what we already know, please brain storm a bit at the closing. Something more than than perfunctorily given here: "support the profligate governments of Europe’s welfare states and keep the formation of the socialistic super-state in Europe on track". No disrespect, but frankly your post is blurring together in this bland sameness as many others before them.
Walk on the wild side and speculate. Is this just an exercise so that the rich get richer while supporting the power centers or is something else afoot? Please, someone with a track record and creditability (and someone who doesn't claim Aliens or the 'Dragon family' are going to save us) step out of line for once and differentiate themselves.
Print and they will come.
They've got good Japanese and American teachers.When in trouble,just keep printing paper,(by the trillions).If the government is kind enough to send me a fiat cheque for ten grand,I'll immediately buy gold with it.