This page has been archived and commenting is disabled.

As The ECB Crosses The Inflationary Rubicon Has Mario Draghi Lost All Control?

Tyler Durden's picture




 

Having been heralded around the world for solving Europe's crisis, ECB head Mario Draghi confidently states (as does every other central banker in the world) that "should the inflation outlook worsen, we would immediately take preventive steps". However, a recent analysis by Tornell and Westermann at VOX suggests the ECB has hit its limit with regard to its anti-inflationary fighting measures. The ECB appears to have lost control over standard measures of tightening: short-term interest rates (since short-term lending to banks has dropped to practically zero), increase in minimum reserve requirements (practically impossible withouit crushing the banks that they have propped up due to the sharp asymmetries - the recent cut from 2% to 1% minimum reserves saw a remarkable EUR104bn drop), and finally asset sales (the quantity of 'sensitive' or encumbered assets on the ECB's books has reached such a scale - due to LTRO, SMP, and ELA programs - leaving the 'sellable' non-sensitive assets at a level below excess deposits for the first time in ECB history). As the authors note, while this does not immediately produce an inflation flare, the lack of maneuvering space will induce an inflationary bias to ECB monetary policy as Draghi will find it increasingly expensive  at the margin to hit the anti-inflationary brakes. "This bias puts the Eurozone at risk of de-anchoring long-run inflationary expectations. The danger is not inflation today, but the de-anchoring of expectations about future inflation." As we have noted many times before, the ECB (and for that matter most central banks in the world) need Goldilocks.

 

Standard monetary 'instruments' to control inflationary concerns (or the ECB's ability to absorb an excessive increase in liquidity) have hit a limit:

Short-term interest rates will be ineffective since ECB lending to MFIs is now minimal:

 

Increasing the minimum reserve requirement will crush banks capital - especially damaging for low-excess deposit countries where systemic bank runs would likely occur:

And finally asset sales is very limited since the unencumbered (or non-sensitive) ECB assets - that are practically saleable - have crossed below the excess deposits level for the first time - standing at just 26% of the balance sheet (simply out the ECB would not have enough non-sensitive assets to sell in order to cover a withdrawal of excess deposits by banks):

 

In summary, the intersections in Figures 1 and 3 make clear that the ECB has lost its ability to implement standard anti-inflationary policies.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 03/28/2012 - 09:04 | 2296916 GetZeeGold
GetZeeGold's picture

 

 

OMG!

 

Sorry.....I'm sure everything will be fine.

 

Wed, 03/28/2012 - 09:09 | 2296933 LawsofPhysics
LawsofPhysics's picture

Well, either that or the E.Z. is planning a massive fire sale.  Simply more proof that cash is not moving and no one trusts anyone else.  Precisely what happens when you try to solve a solvency problem with more liquidity.

Wed, 03/28/2012 - 09:41 | 2297038 economics9698
economics9698's picture

Imagine that, thieves not trusting thieves.  Who would have seen that coming?

Wed, 03/28/2012 - 09:50 | 2297048 GetZeeGold
GetZeeGold's picture

 

 

Even though they said they would do it......I just didn't think they were crazy enough to actually follow through on it.

 

 

Wed, 03/28/2012 - 10:18 | 2297129 KickIce
KickIce's picture

Battle of the sociopaths.

Wed, 03/28/2012 - 14:54 | 2298151 RollinsArline3
RollinsArline3's picture

my classmate's sister makes $67/hour on the laptop. She has been without a job for 6 months but last month her pay was $20212 just working on the laptop for a few hours. Read more on this web site .....  http://lazycash9.com

Wed, 03/28/2012 - 18:21 | 2298887 UP Forester
UP Forester's picture

Someone else has a classmate's sister making $67/hour on her laptop?

That's unbelievable!

Wed, 03/28/2012 - 09:12 | 2296953 francis_sawyer
francis_sawyer's picture

Press conferences! WE NEED MORE PRESS CONFERENCES!

Wed, 03/28/2012 - 10:00 | 2297081 Sudden Debt
Sudden Debt's picture

I'm sure that after the "elections" that Obama will be more flexible in cranking up the propaganda machine and provide you hourly press conforence about what went wrong and who's fault it is.

 

Wed, 03/28/2012 - 09:18 | 2296970 DeltaCharlie
DeltaCharlie's picture

Yes, not a worry.... except Europe won't look as nice without any trees!

Wed, 03/28/2012 - 09:25 | 2296994 LongBalls
LongBalls's picture

And we wonder why banksters are pushing for a cashless society? No cash. No withdraw.

Wed, 03/28/2012 - 10:35 | 2297164 flacon
flacon's picture

If that's the case, then the only way to "withdraw" one's money would be to spend it - just like they did in Weimar, buying anything that has value today. This will increase money velocity which is the same as increasing money supply and it will unleash the Kraken called hyperinflation. 

 

http://en.wikipedia.org/wiki/Kraken

 

Wed, 03/28/2012 - 09:03 | 2296918 -1Delta
-1Delta's picture

ipads will fix this

 

dont worry IV reflects this

Wed, 03/28/2012 - 09:05 | 2296924 kralizec
kralizec's picture

Well, if they can't beat inflation I'm guessing they'll help push it further along!

Embrace the horror!

Wed, 03/28/2012 - 09:20 | 2296964 Zero Govt
Zero Govt's picture

it wouldn't be the near €3 trillion increase the ECB's balance sheet that's causing inflation would it?

controlling inflation or deflation (the market re-pricing) is the King Canute of central bankers drowning in their own narcistic gullability (stupidity)

the world is 'governed' by the village idiots of economics, just read Bubble Bens 'study' of The Great Depression for a great laugh

Wed, 03/28/2012 - 09:08 | 2296934 Sandmann
Sandmann's picture

Simply take all Banks into State control and shoot bankers. Hjalmar Schacht, Hitler's Central Banker ended up in a Concentration Camp.........they want to play with fire in Europe....they should see where it leads !

Wed, 03/28/2012 - 09:21 | 2296981 GeneMarchbanks
GeneMarchbanks's picture

Empire collapses first at periphery although this is more of sacrifice to appease the Gods. How quickly chaos will ensue.

I'm looking forward to the new Olympic event this summer: Spear throwing at bankers.

Wed, 03/28/2012 - 09:32 | 2297018 GetZeeGold
GetZeeGold's picture

 

 

Stop teasing us.

 

Wed, 03/28/2012 - 10:24 | 2297144 KickIce
KickIce's picture

Open the coliseum, bankers vs politicians

Wed, 03/28/2012 - 09:24 | 2296993 bank guy in Brussels
bank guy in Brussels's picture

Interesting character, Hjalmar Horace Greeley Schacht ... his middle names after the US 1800s journalist ...

« In August, 1934, Hitler appointed Schacht as his minister of economics. Deeply influenced by the economic ideas of John Maynard Keynes and Roosevelt's New Deal ....

In 1934 he arranged with the World Zionist Organization, a deal where German Jews could pay 15,000 reichmarks to emigrate to Palestine. It is estimated that over the next four years over 170,000 reached Palestine under this agreement. ...

Schacht disagreed with what he called "unlawful activities" against Jews ... He pointed out that Jews had fought bravely in the German Army in the First World War and deserved to be treated fairly. ...

... he was approached ... to become involved in plots against Hitler. Schacht refused but in 1944 he was arrested and charged ... sent to Dachau Concentration Camp ... died in Munich on 4th June, 1970 »

http://www.spartacus.schoolnet.co.uk/GERschacht.htm

Wed, 03/28/2012 - 09:08 | 2296935 jus_lite_reading
jus_lite_reading's picture

If anyone needed more proof that the entire world was caught up in a ponzi spiral... here it is. No wonder the new PIIGS yields are already skyrocketing!! LMAO!!

Wed, 03/28/2012 - 09:09 | 2296940 surf0766
surf0766's picture

First station with $4.00 + reg gas this morning. First since last summer. The final cliff has arrived.

Wed, 03/28/2012 - 09:15 | 2296963 aleph0
aleph0's picture

 

 

4$ ? ... that's cheap .

Europe registered 10$ a few days ago ... 4$ + 6$ Tax !

Wed, 03/28/2012 - 09:20 | 2296979 surf0766
surf0766's picture

in 2008 at 4.24 life stopped. In 2011 at 4.05 life stopped again.

Wed, 03/28/2012 - 13:13 | 2297754 donsluck
donsluck's picture

Your are confusing life with death. Petroleum is death, a slow, fat, choking, clogged diabetical death.

Wed, 03/28/2012 - 09:22 | 2296983 jus_lite_reading
jus_lite_reading's picture

I agree... I see $4 as the tipping point

Wed, 03/28/2012 - 09:09 | 2296941 q99x2
q99x2's picture

Draghi em to the gallows.

Wed, 03/28/2012 - 09:48 | 2297056 jus_lite_reading
jus_lite_reading's picture

Clever

Wed, 03/28/2012 - 09:11 | 2296947 francis_sawyer
francis_sawyer's picture

He's still tinkering around in his apprenticeship of mastering the fine art of the printing press...

Wed, 03/28/2012 - 09:12 | 2296949 i-dog
i-dog's picture

Ruh-roh!

Wed, 03/28/2012 - 09:12 | 2296950 kaiten
kaiten's picture

iInflate

Wed, 03/28/2012 - 09:12 | 2296951 ZeroPoint
ZeroPoint's picture

Conflagration cometh.

Wed, 03/28/2012 - 09:14 | 2296956 francis_sawyer
francis_sawyer's picture

Anchors Aweigh bitchez!

Wed, 03/28/2012 - 09:15 | 2296959 Dick Darlington
Dick Darlington's picture

And here's BUBA's Weidmann again:

*WEIDMANN SAYS INFLATIONARY PRESSURES WILL RISE IN GERMANY

*WEIDMANN SEES PRICES RISING IN SOME PARTS OF GERMAN HOUSE MKT

*WEIDMANN SAYS ECB POLICY GEARED TO EURO AREA AS A WHOLE (Lol!)

*WEIDMANN SAYS TARGET2 IMBALANCES ARE HUGE

*WEIDMANN SAYS TARGET2 IMBALANCES ARE A SYMPTOM OF CRISIS

*WEIDMANN SAYS TARGET2 IMBALANCES NOT A WORRY IF UNION INTACT

     March 28 (Bloomberg) -- European Central Bank Governing
Council member Jens Weidmann said he doesn’t see willingness by
euro-area governments to move toward full fiscal union.
     “The European summits have shown there’s no appetite for
this,” Weidmann said at an event in London today. “They have
quite clearly stated there’s no willingness to give up national
sovereignty.”

 

Wed, 03/28/2012 - 09:16 | 2296965 firstdivision
firstdivision's picture

Was there a SPR release announced? WTI decided to base jump

Wed, 03/28/2012 - 09:27 | 2297001 WoodMizer
WoodMizer's picture

Just another hint at future consideration of release.

TPTB need energy prices to go down to improve consumer sentiment in Europe and the US.

Wed, 03/28/2012 - 09:40 | 2297031 pupton
pupton's picture

My guess is that they will promise it, but hold off on the official announcement until just before Memorial Day.  Then they get the most bang for the buck with the summer vacationers.  They would have to keep the tap open long enough to let Obama buy himself another term with OUR 'STRATEGIC' OIL RESERVE.  Sadly, I doubt the release of any oil reserves will have the intended effect.

Wed, 03/28/2012 - 09:48 | 2297057 mayhem_korner
mayhem_korner's picture

 

 

Orchestrating a drop from $4.45 to $4.32 per gallon at Memorial Day won't do much.

Wed, 03/28/2012 - 09:17 | 2296966 DormRoom
DormRoom's picture

Interesting article on the links of malinvestment, recessions and the problems when ZIRP < the natural rate of interest.

 

http://blogs.telegraph.co.uk/finance/andrewlilico/100015883/the-bank-of-...

Wed, 03/28/2012 - 09:25 | 2296991 GeneMarchbanks
GeneMarchbanks's picture

No such animal as 'the natural rate of interest' in warfare economics my child.

Wed, 03/28/2012 - 10:22 | 2297137 Zero Govt
Zero Govt's picture

actually there's no such thing as "natural interest rates" at any time

the academics are on Planet Uranus (as usual) basing it on an economy in balance, when the economy, by natural design, is always in a state of flux/imbalance

interest rates should be set by a free market, not village idiots sipping tea at central banks committee meetings ...you couldn't get further away from the market (reality)

Wed, 03/28/2012 - 09:20 | 2296978 Boston
Boston's picture

Bullish?

Wed, 03/28/2012 - 09:22 | 2296982 Bullwinkle Moose
Bullwinkle Moose's picture

Just sitting under my shade tree smiling and counting my PMs.

Wed, 03/28/2012 - 09:24 | 2296988 AssFire
AssFire's picture

As we have noted many times before, the ECB (and for that matter most central banks in the world) need Goldilocks.

 

Ahh, how about dreadlocks and hair extenstions? We got that shiat covered like a jimmy hat.

Wed, 03/28/2012 - 09:25 | 2296995 ISEEIT
ISEEIT's picture

Oh don't go worrying about inflation. It will be global and require a GLOBAL solution.

Hint:

Like a new currency?

Wed, 03/28/2012 - 09:29 | 2297007 spastic_colon
spastic_colon's picture

This sounds exactly like the rhetoric the fed used (uses) over the last 4 years.......ho hum

Wed, 03/28/2012 - 09:33 | 2297020 LongSoupLine
LongSoupLine's picture

Tyler you silly, you're so negative...

 

gee, didn't you hear Drahgi and Monti say "problems are in the past"?

Wed, 03/28/2012 - 09:52 | 2297043 JohnKozac
JohnKozac's picture

Who needs reserves? The "reserves" they normally keep are nothing but other nations' debts; i.e., bonds.

Wed, 03/28/2012 - 09:57 | 2297074 Subliminal messenger
Subliminal messenger's picture

 Zee price stabilityyy will go bunga bunga.

Wed, 03/28/2012 - 09:59 | 2297077 yogibear
yogibear's picture

Bernnake, the Federal Reserve and the ECB are pushing real inflation higher than anything we have seen before. Oil and commodities/food are going to see consistantly large price increases. The central banks have already pushed inflation with continued printing. 

Wed, 03/28/2012 - 10:22 | 2297138 spastic_colon
spastic_colon's picture

finally out of hibernation? ;)

Wed, 03/28/2012 - 10:02 | 2297085 MrBoompi
MrBoompi's picture

The derivatives market has left us (and Europe) hostage to inflation.  We can't do what Paul Voelker did, raise interest rates higher than the rate of inflation.  We don't even "measure" inflation correctly.  Plus, if you think the banking system is undercapitalized now, just think what would happen in the interest rate derivatives markets if the interest rate went up to 8 or 10%.  There just isn't enough money to pay off all of those bets, and Bernanke knows it.  So there is only one option, hold rates at zero and print to get out of any jam you might face....rinse.....repeat.

Wed, 03/28/2012 - 10:13 | 2297113 cranky-old-geezer
cranky-old-geezer's picture

 

 

This article is complete bullshit.

ECB lost control when they decided to take worthless securites in exchange for (freshly printed) euros in LTRO 1, 2, 3, 4, etc.

ECB has become a laundering operation, laundering worthless securites into euros ...just like the Fed incidentally.

None of the other bullshit in this article matters.  Interest rates will stay at zero to keep government debt from imploding. None of the worthless bullshit on ECB's balance sheet will ever be sold because (a) it would pull euros out of circulation which nobody wants, and (b) the crap is worthless, it has value only on ECB's fairytale balance sheet, if they try to sell any of it, it'll go bidless because nobody wants it. 

That's called mark-to-market by the way, and ECB would discover there is no market for any of the worthless crap on their balance sheet.

Wed, 03/28/2012 - 10:21 | 2297135 LawsofPhysics
LawsofPhysics's picture

precisely, it is a solvency problem, not a liquidity problem.  You are only solvent if you have assets that other people want/need.

Wed, 03/28/2012 - 10:47 | 2297194 SoundMoney45
SoundMoney45's picture

The point that maintaining the charade from an ECB balance sheet perspective is becoming more difficult is useful.

Wed, 03/28/2012 - 11:58 | 2297502 lagrossebertha
lagrossebertha's picture

Why would required reserves drop when excess reserves increase ?

Wed, 03/28/2012 - 12:37 | 2297634 xcehn
xcehn's picture

"So why has Draghi handled the crisis the way he has? Why did he sit on his hands for so long while interbank lending slowed, overnight deposits climbed to new records, sovereign bond yields skyrocketed, and all the gauges of market stress got so much worse? The obvious answer to this question is that Draghi’s been using the crisis to pursue his own agenda. He wants to push through his so called ”fiscal compact” that enshrines harsh budget discipline and labor-battering austerity measures into law so that national budgets will come under the control of financial elites (aka–ECB-designated “technocrats”) Naturally, nations aren’t going to surrender that kind of authority without a fight, so Draghi let the crisis get out-of-hand so there would be less resistance. Here’s how economist Dean Baker sums it up: The people who gave us the eurozone crisis are working around the clock to redefine it in order to profit politically. Their editorials – run as news stories in media outlets everywhere – claim that the euro crisis is a story of profligate governments being reined in by the bond market. This is what is known in economics as a lie. The eurozone crisis is most definitely not a story of countries with out of control spending getting their comeuppance in the bond market…It is a story of countries victimized by the mismanagement of the ECB….People should recognize this process for what it is: class war. The wealthy are using their control of the ECB to dismantle welfare state protections that enjoy enormous public support. Draghi’s real goal is to implement the labor reforms and “adjustments” that big finance demands. He’s already succeeded in deposing two democratically elected leaders in Greece and Italy and replacing them with bank-friendly stooges that will carry out his diktats. Now, he’s on to bigger things, like slashing the social safety net, crushing the unions, and reducing the eurozone to third world poverty."

http://www.globalresearch.ca/index.php?context=va&aid=28335

Do NOT follow this link or you will be banned from the site!