Bundesbank's Weidmann Warns: Debt Monetization Is An Addictive Drug

Tyler Durden's picture




 

It is one thing for various anti-Central Planning (and thus central bank) outlets to warn, over 3 years ago, that easy monetary policy is merely an enabling substance, and is addictive as any drug to a dysfunctional political establishment which is more than happy to avoid fiscal prudence if monetary policy is readily available to delay the inevitable day of reckoning when monetizing the debt will no longer work. It is a different matter entirely when the head of the world's only solvent central bank -  the German Bundesbank, which happens to be the biggest guarantor of that other mega hedge funds the ECB, and which of all developed economies also happens to have had the closest recent encounter with hyperinflation (unlike all the "other" theoretical experts who enjoy talking extensively about matters they have zero experience with). In an interview with German Spiegel magazine, Buba head Jens Weidmann, once again has loudly warned what as recently as 2009 very few dared to even think: namely that rampant and gratuitous deficit plugging using central bank debt issuance, and thus explicitly monetizing the debt, "can be addictive as a drug." Obviously, like any drug overdose, the aftereffects are always fatal.

From Spiegel:

Bundesbank President Jens Weidmann has strongly criticized of the plans of the European Central Bank to launch a new program to purchase government bonds. "Such a policy is for me too reminiscent of public funding via printing," Weidmann warns in an interview with SPIEGEL. "In democracies it is parliaments that should decide on such an extensive pooling of risks, and not central banks."

 

If you buy the Euro-banks government bonds of individual countries, "the papers end up in the balance sheet of the Eurosystem," Weidmann warns: "Ultimately, the taxpayers of all other countries pay." The basic problems are not solved in this way, the Bundesbank president - on the contrary: "The blessing of the central banks would raise persistent monetization demands," said Weidmann in SPIEGEL. "We should not underestimate the risk that central bank financing can be addictive like a drug."

Is Weidmann insane? After all, central banks are known to always end their futile unconventional and massive monetization programs on cue and when promised, because they are always so well attuned to the threat of runaway inflation when the assets of global cental banks account for 30% of global GDP. Naturally, this explains why after two failed Quantitative Easing episodes, and two additional Curve shaping, flow-facilitating exercises by the Fed, there is not even a peep of more NEW QE on the horizon - after all Ben has certainly learned his lesson that the Fed is powerless to do anything when the political authorities are bickering and will do nothing to reach a consensus until the market is in free fall mode, as it was in August 2011 when the only catalyst that led to a debt ceiling hike was a market plunge.

Oh wait...

Spigel continues. 

Weidmann also provides for the independence of the ECB at risk. At second glance, to trap it in the plans "amounts to concerted actions of government bailouts and the Federal Reserve. This creates a link between fiscal and monetary policy." He wanted to "avoid, that monetary policy is under the dominance of fiscal policy."

Does the BUBA head see an imminent inflationary threat? No, and thank god. Because if the time comes that real inflation does finally arrive (as opposed to soaring prices only in things that "nobody" needs like food and energy) and the major central banks have to some how offload about $20 trillion in asset between them, then say goodbye to the status quo.... and any fiat reserve status. 

Weidmann does not see an immediate threat of inflation. "But if the monetary policy can be pegged as comprehensive political problem solvers, the central banks' real goal is threatening to drift more and more into the background." Weidmann warns therefore against commitments of the ECB to "guarantee the whereabouts of member countries in the euro zone at any price". When deciding on a possible exit of Greece "must surely play a role that no further damage is done to the trust framework of monetary union and keep the economic conditions of the assistance programs credibility."

All of the above, and the fact that German now singlehandedly calls all the shots in Europe, also explains why the ECB's latest rumored actions have slipped into the twilight zone: bond yield thresholds, though not just any bond yield thresholds, but of dodecatuple "secret" type which are completely not public (and thus do not hinder reelection chances): in other words, Schrodinger monetary policy, where CBs get the effect of the policies they (but not Germany) would like to enact, but are terrified to launch the cause.

According to recent SPIEGEL information, European central bankers would establish interest rate thresholds above which the ECB would intervene with bond purchases. This would ensure that interest rates on government bonds issued by countries such as Spain and Italy do not rise above a certain level. This proposal was, however, missing some central bankers' and the federal government's approval. A spokesman for Finance Minister Wolfgang Schaeuble called the discussed variant as "burdened with problems." Therefore, some central bankers argue now apparently for the caps to be set internally, and remain unpublished. Some central bankers would prefer this approach to a recently discussed official ceiling, the newspaper reported.

 

The Governing Council will decide at its 6 September meeting what the promised bond purchases could look like.

Spoiler alert: they will look like nothing, because the ECB will not go ahead and enact any bond caps, secret or otherwise. Unless they want to conduct monetary policy in the absence of Germany, who have about had it with the Goldman alumnus' attempt to make European monetary policy merely an add on to Goldman year end bonus policy.

Finally, for those who think the US is immune from any of this, look at the chart below. It shows that most recently, a whopping 40% of US funding needs were "met" through debt issuance.

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Sun, 08/26/2012 - 08:34 | 2738282 Winston Churchill
Winston Churchill's picture

9.

Sun, 08/26/2012 - 08:37 | 2738287 GetZeeGold
GetZeeGold's picture

 

 

Can totally quit anytime I want.....I just choose not too.

 

Sun, 08/26/2012 - 09:01 | 2738320 flacon
flacon's picture

I can raise interest rates in 15 minutes if I have to. I just choose to keep them low.

Sun, 08/26/2012 - 09:02 | 2738321 Peter Pan
Peter Pan's picture

Quitting is easy. I have already quit 240 times this year.

Sun, 08/26/2012 - 17:10 | 2739081 Lore
Lore's picture

 

 

Yes -- That's exactly the point. THIS IS WHAT THEY WANT. All talk to the contrary is noise. If they could keep the cart rolling by doing this forever, they would. It's exactly like "Harm Reduction" for drug addicts: perpetuate the addiction, perpetuate (and grow) the Victim Industrial Complex. In matters of debt and drug addiction, you want to control supply AND demand. That is the guiding principle of elite socio-fascist-pathocratic international banking and foreign policy. The outcome is total systemic breakdown resulting from complete and utter misallocation of capital. (Big hint: you'll know the end is near when they start talking about a Carbon Tax.) Their work done, the sociopaths will leave us to pick up the pieces again.

Sun, 08/26/2012 - 10:34 | 2738419 LMAOLORI
LMAOLORI's picture

 

 

 

The Fed has been monetizing our debt what I would really like to see on Zero Hedge is an article explaining to people what that means and how it affects them.

 

WSJ: Fed Buying 61 Percent of US Debt

We Will Not Monetize The Debt – Bernanke

"“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending. “Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”"

Bernanke Lies Under Oath re: Monetizing Debt


 

 

Sun, 08/26/2012 - 10:46 | 2738454 Sean7k
Sean7k's picture

We have to be fair here. Most of the monetization goes to banks and the money that goes to government has interest payments tied to it- more money for banks. If the FED didn't create the money, how would the banks be able to profit from its' use? It's not like the banks EARN their money.

Ben doesn't lie, he just doesn't tell the truth. Anyway, jews don't have to tell the truth to gentiles. So, it's all good!

Sun, 08/26/2012 - 15:18 | 2738915 Sandmann
Sandmann's picture

Interest is a Cost Burden that is not productive. Every LBO imposes increased cost on consumers not attributable to product innovation

Sun, 08/26/2012 - 11:37 | 2738527 Republicae
Republicae's picture

It is the nature of this monetary system to organize debt into currency, the differences between a dual-tiered fiat monetary system and a single-tiered system is that the dual-tiered system has a slightly longer life-span before the entire system collapses than does a single-tier system where the government simply monetizes debt directly. The reason for that is because a dual-tiered system organizes debt into currency through a debt-market allowing for the association of massive inflationary depreciation risk to be spread among the entities which purchase the debt instruments. In the case of the U.S. we have exported inflation to the rest of the world while maintaining a relatively stable pricing structure within this country, partially due to the Reserve Currency status of the U.S. Dollar, that however, is about to change.  

Sun, 08/26/2012 - 09:17 | 2738341 Sir Humphrey
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Welcome to the European Roach Motel California! You can check out any time you like but you can never leave!

Sun, 08/26/2012 - 09:26 | 2738350 TIMBEEER
TIMBEEER's picture

You can leave any time and let the German guest pay the bill.

Sun, 08/26/2012 - 12:37 | 2738632 stocktivity
stocktivity's picture

Too young for the Eagles I see

Sun, 08/26/2012 - 18:58 | 2739358 schadenfreude
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9!

Sun, 08/26/2012 - 08:35 | 2738283 LoneStarHog
LoneStarHog's picture

Weidmann ... You must be the original Captain Obvious ... Addictive? ... Ya think?

Sun, 08/26/2012 - 09:01 | 2738319 bank guy in Brussels
bank guy in Brussels's picture

What the Bundesbank people are avoiding talking about ...

How Germany really created the euro-zone mess ... and how the German banks would collapse in a euro break-up scenario ... interview of Adam Posen, formerly of the Bank of England:

« ... "The debt crisis is the result of decisions by the Germans who acted similarly to sub-prime lenders in the US … It was German government decisions and German banks who lent the money to all these countries so they could buy German exports," said Posen. Germany has "been running a scheme and so just as everywhere around the world you want to restructure the debt, you can’t make it all on the borrower." Lenders have to "take a hit" as well, he said. ... In break-up scenario, Germany’s currency would “shoot through the roof,” the country’s trade relations would be disrupted and its banks have to be bailed out, Posen said.»

http://www.businessweek.com/news/2012-08-21/germany-ill-advised-to-let-e...

Sun, 08/26/2012 - 09:12 | 2738329 centerline
centerline's picture

Mutually assured financial destruction. That is just scratching the surface.  Expand it to oil, food, water, medicine, etc.

There is no easy way out, no one is going to accept losing, and if we continue on the current course the stakes only get raised till we finally reach a inevitable breaking point.

My bet is we keep on trucking right into the event horizon - which we will pass quietly without knowing it in advance.

 

Sun, 08/26/2012 - 10:05 | 2738385 Nachdenken
Nachdenken's picture

"It was German government decisions and German banks who lent the money to all these countries so they could buy German exports...."

German exports are bought because German products are the better. 

German banks lend where there is borrower pressure, they cant lend where there is no demand for credit.  The strong and stable  DMark was desirable as a trading and balance sheet bulking currency.

Export and domestic surluses are recycled to areas where those surplusses may be maintained.

Tied loans are a feature of different nations, begin with the USA, France, the UK and now China.

Nice to now know there are sub-prime lenders in the US.  Who was a sub-prime lender until the US derivative and swap industry built massive economic castles in the air which are now being supported by more sub-prime lending by all European banks.

Get off German bashing, they are the last in line after the US, the UK and France.

 

Sun, 08/26/2012 - 10:24 | 2738421 Sean7k
Sean7k's picture

Must be why greece was given all those loans to buy german military equipment. Or china gave greece loans to buy ships they don't need. Markets are created by funding and influence (military). Yes, germans make great products, but not everybody can afford them without "help". 

"German bashing", please, is this what passes for propaganda? You explain german loan programs to buy their products and maintain employment levels, then call it bashing?

Get off the xenophobic train. 

Sun, 08/26/2012 - 15:17 | 2738911 Sandmann
Sandmann's picture

So China was loaned money to buy German imports by the USA which ran huge trade deficits to supply the Chinese with Dollars they could then recycle through the US Banking System to produce Synthetic CMOs to sell to European Banks to expand credit in the EuroZone on the back of S&P and Moddys rated "A-grade" Bonds

Sun, 08/26/2012 - 15:15 | 2738908 Sandmann
Sandmann's picture

Like Posen is reliable - a Trilateral Commission member - he forgets CHINA as the real disruption in global economics and finance - that is what caused the Sub-Prime Crisis by recycling cheap credit to nations running huge trade deficits and permitting surplus countries to run up Credits that were unsustainable. It was the suspension of proper economic balance in trade that caused the whole mess

Sun, 08/26/2012 - 08:36 | 2738284 Monk
Monk's picture

Total money supply is essentially that.

 

Sun, 08/26/2012 - 08:37 | 2738286 I am Jobe
I am Jobe's picture

Crack, IAPPS Bitchezzz. Maybe they need Odumba and Mittens in Europe with their chrm. Send a few inbred Amerikans.

Sun, 08/26/2012 - 08:48 | 2738291 GetZeeGold
GetZeeGold's picture

 

 

And then depression set in.......we might actually have to fix this ourselves.

 

Well......that's just great freakin news there.

 

Sun, 08/26/2012 - 08:53 | 2738307 deez nutz
deez nutz's picture

And then depression set in.......we might actually have to fix this ourselves.

I would consider a DEEP and DARK, painfully horrendous american depresson more of an economic correction - one that has been longforth in coming (20 - 25 yrs?).  The end of the "Great American Credit Donkey" as we know it!

You will know it is here when 80% of the cars you see on your local Blvd. are more than 10 yrs. old and college kids' cars have rust.

Sun, 08/26/2012 - 08:43 | 2738288 Zola
Zola's picture

And today Neil Armstrong died. One after another, lights of courage, honor and greatness are being extinguished all over America. What is this country becoming...

Sun, 08/26/2012 - 08:49 | 2738301 GetZeeGold
GetZeeGold's picture

 

 

You totally can choose........marxist, communism....or socialism.

 

Choose wisely grasshopper.

 

Sun, 08/26/2012 - 09:00 | 2738318 Alcoholic Nativ...
Alcoholic Native American's picture

*****blows dog wistle****

Sun, 08/26/2012 - 10:36 | 2738442 Atomizer
Sun, 08/26/2012 - 09:02 | 2738322 I am on to you
I am on to you's picture

What about Alcoholism....Egoism..... Economism.... Drugism...Reganism or Capitalism, the virus that caused it all:Dont underestimate the addictivness of Gambling,especialy with other people lives, health and money:

Velcome to Planet Vegas ,slothalls and what follows!

Sun, 08/26/2012 - 10:00 | 2738376 GetZeeGold
GetZeeGold's picture

 

 

Thought those were the same damn thing.....I've seen an occupy rally.

 

Sun, 08/26/2012 - 09:13 | 2738330 deez nutz
deez nutz's picture

You totally can choose........marxist, communism....or socialism.

I think we will enter more of a fascist state as the depression begins. Politicians protecting the main source of campaign revenue, as we are seeing now. As the fabric of society breaks down and violence erupts the nation will have no choice to covert to socialism.

Sun, 08/26/2012 - 08:39 | 2738289 fonzannoon
fonzannoon's picture

I took an incredible beating on here yesterday with the shooting article in NYC. Part of my beating was attributed to defending the media coverage and how they quickly pointed out that police were responsible for the victims.

Please accept this link (from this morning) as my apology. This is ridiculous borderlining on insane.

http://www.nypost.com/p/news/local/manhattan/experts_wounded_are_price_you_pay_tn94AHxbq1Gj3qhIQaTBTL

Sun, 08/26/2012 - 08:47 | 2738296 GetZeeGold
GetZeeGold's picture

 

 

Well I for one totally accept your apology.

 

I'm guessing you have something else to say.......it's just a guess.

 

Sun, 08/26/2012 - 08:52 | 2738305 fonzannoon
fonzannoon's picture

Nah, I was caught off guard by some of the responses but I said what I had to say. No need to repeat it. On that one aspect (the media) I had to come back here and own up, when I read that piece.

Sun, 08/26/2012 - 08:59 | 2738317 centerline
centerline's picture

The PR machine is hard at work for sure. That one really takes the cake.

Sun, 08/26/2012 - 09:21 | 2738342 deez nutz
deez nutz's picture

quickly pointed out that police were responsible for the victims.

if you break this down you can backward engineer what is taking place.  Police came in with "guns ablazing" even though the assailant was not shooting.  In the old days they would assess the situation and one officer would give a command - "drop the weapon!".     You can surmise the police are being trained as well as conditioned that WHEN the SHTF you have to stop it immediately without regard to the surroundings - a full on frontal assault.  Who will get the blame in all this? the assailant as he "broke the peace".   They just reacted in accordance to their conditioning. 

Sun, 08/26/2012 - 08:47 | 2738297 apberusdisvet
apberusdisvet's picture
Hyperstagflation will be the new buzzword of the remainder of this decade.
Sun, 08/26/2012 - 08:48 | 2738300 LawsofPhysics
LawsofPhysics's picture

Boom - that is all.

Sun, 08/26/2012 - 08:50 | 2738303 GetZeeGold
GetZeeGold's picture

 

 

Fin......nothing more to say.

 

Sun, 08/26/2012 - 08:50 | 2738302 AUD
AUD's picture

the world's only solvent central bank -  the German Bundesbank

Are you sure about that?

Sun, 08/26/2012 - 09:23 | 2738346 TIMBEEER
TIMBEEER's picture

yeah, I laughed at that crap. They should have a long hard look at Germany to realize how debt-ridden the zoo-like Germany is these days.

Sun, 08/26/2012 - 08:50 | 2738304 elwu
elwu's picture

Weidmann or his predecessort Weber should have become predident of the ECB.

Not again a representative of the ClubMed, a GS alumni on top of that.

However, due to the ridiculous distribution of power (for instance Malta (look up where and what that is) has the same voting power as Germany) in the ECB council, this would be just a beginning to get the ECB and so the Eurozone onto a sustainable path. Next step must be that the ECB council voting powers are strictly according to the economic weight of the memeber countries. Next step then the same for the EU commission, and the rest of the undemocratic supranational organisations.

Sun, 08/26/2012 - 09:24 | 2738348 TIMBEEER
TIMBEEER's picture

If a German was to head the ECB (or the EU), they would blame the Germans, whatever happened.

Oh, wait..

Sun, 08/26/2012 - 09:24 | 2738349 Winston Churchill
Winston Churchill's picture

So just remove the junkies works while he takes a hit.

Good luck with that.

Thats why the euru will fail.

Sun, 08/26/2012 - 09:15 | 2738335 kornholio
kornholio's picture

Bullish

Sun, 08/26/2012 - 09:30 | 2738354 AynRandFan
AynRandFan's picture

Monetization induced inflation hits unevenly.  Imported necessities like oil, clothing, food go up.  Real estate stays down.

Sun, 08/26/2012 - 09:33 | 2738356 SafelyGraze
SafelyGraze's picture

when I was a kid, I was told never to give money to a hobo.

he'l just spend it on booze. and hookers.

if you want to help, you can offer him a sandwich.

Sun, 08/26/2012 - 09:35 | 2738359 SafelyGraze
SafelyGraze's picture

spoiler: 

never give bailout to banker

he'll just spend it on derivatives and further indebtedness. and crack. and hookers.

if you want to help, you can offer him an ebt card.

Sun, 08/26/2012 - 09:44 | 2738365 vertexa
vertexa's picture

Laid-Off US Workers Are Taking Huge Pay Cuts At Their New Jobs WASHINGTON (AP) — The U.S. economic recovery hasn't felt much like one even for people who managed to find new jobs after being laid off. Most of them have had to settle for less pay.
Only 56 percent of Americans laid off from January 2009 through December 2011 had found jobs by the start of this year, the Labor Department said Friday. More than half of them took jobs with lower pay. One-third took pay cuts of 20 percent or more.

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