Sometimes it’s impossible to tell whether the financiers and politicians who carry water for the central banks are bad liars or just clueless dolts. A bureaucrat from the U.K. surfaced in the Wall Street Journal over the weekend, exhaling what seemed to us an ostentatious sigh of relief over the supposed success of the European Central Bank’s latest loan program: “[It provides] a very significant degree of breathing space to banks.” Yeah, sure. A very significant degree — as though the banking system’s terminally decaying colossus were not in danger of imploding tomorrow — and for no greater reason, possibly, than that some hapless bank clerk erroneously misplaced a decimal point.
The bureaucrat’s remark appeared, with unintended irony, in a story about how European banks are in a quandary over how to redeploy a torrent of digital cash that has recently come their way from the ECB’s magical credit-infindibulator. Recall that the banks sucked up €489 billion ($641 billion) in a matter of weeks after the ECB made that sum available to them in December for three years on super-easy terms. But what to do with it all? None of them are in the mood to lend to – heaven forbid! — businesses, and that leaves only two bad alternatives: using the digital money to buy government bonds from the
sordid likes of Greece, Italy and Spain; or hoarding it at a loss. A loss? Well, it turns out that although the ECB is charging commercial banks a nominal rate of 1% to borrow as much as their greedy little hearts desire, the central bank is paying them only 0.25% on overnight deposits. Call us cynical, but we can’t see how the growing asymmetry of this relationship will produce a solution to Europe’s debt problems. In fact, it reminds us of the old joke about the rent-to-own furniture store whose prices were so low that it would have been impossible to make money. Actually, the owner was said to have lost a little money on every transaction. What was his secret? “Volume!”
Last Ounce of Credibility
So, here we have Europe’s banking overlords piling up untold sums of virtual cash, only to concede that the sole “safe” place they can find for it guarantees an annual loss of 75 basis points. At that rate, Europe will be bankrupt before anyone can figure out where the money has gone. Oops, we forgot: Europe already is bankrupt. (Ditto for the U.S.) And, okay, we were only being facetious about figuring out what happened to the money. As any fool could see, it is manifestly not flowing into the economy. In fact, hundreds of billions of dollars – trillions of dollars, if you keep a running total – are floating in the financial ether, unable to find their way into the world of real goods and services. Only a liar or a dolt could assert that this all-too-transparent, economically valueless shell game will continue to provide “breathing space” to the banking system for much longer. Nor is it the huge sums of cybercash that are keeping the game going, but rather what remains of the political establishment’s credibility. One of these days – it could happen tomorrow, or in six weeks, or six months – when that credibility is entirely spent, fiat money will cease to contain the unimaginably destructive forces that have been quietly gathering strength in the bond markets. At that point only disaster seems possible. But certainly not a scenario in which the global economy continues to muddle along while public debt — already many more tens of trillions of dollars than anyone can count — goes parabolic.