A Very Unexpected Statement From A Central Banker: "We Are Merely Reacting To A Situation We Did Not Create"

The ECB's Vitor Constancio, while largely a silent puppet operating quietly in the shadow of his boss, former Goldmanite Mario Draghi, is best known for his tragicomic statement from October 2014 that the ECB will not stress test Europe's banks for deflationary scenario because it simply won't happen...

My question would be on how credible these tests are. Looking at the adverse scenario, you haven't even included deflation. You have not included an interruption in gas imports to Europe. You have not included full-on sanctions on Russia. So please elaborate and convince us.


Constâncio: The scenario for the stress test was published earlier in the year, so some of the things you mentioned would not have been considered. But indeed, what was considered is a severe shock being the growth of other countries. If you look to the scenario, you see that for the US, there is also a big deceleration of growth which is part of the scenario and also for other countries that are the markets of the euro area. So that is embedded in those assumptions of indeed a big drop in external demand directed to the euro area. That's the first point. The scenario of deflation is not there because indeed we don't consider that deflation is going to happen.

... just two months before the same Constancio warned Europe would shortly have its first episode of outright deflation, and which was confirmed in the first week of January...


... precipitating the launch of Europe's own version of QE.

But while the general public is now largely used to central bankers' utter cluelessness when it comes to predicting even the most immediate future, just a few days ago the same ECB vice president uttered something far more confusing and perhaps troubling during the Annual Congress of the European Economic Association, on August 25.

Here is what he said:

Sometimes the criticism directed at our policies implicitly attributes responsibility for the low interest-rate environment to central bank policies. But the truth is precisely the opposite: central banks are simply reacting to and trying to correct a situation that they did not create. Indeed, medium and long-term market interest rates are mostly influenced by investors and market players, as the recent so-called “bund tantrum” illustrates.

Huh? Suddenly central bankers are pulling the Obama 'defense' - it was all the "other guy's fault". But why? And if the current unprecedented regime of ubiquitous central planning is not the central planners' fault,  then whose fault is it?

Well, according to the same ECB comedian, it is the market's fault: the same markets that haven't existed since 2009 when the only "trade" was to frontrun, drumroll, the central bankers.

It gets better, because suddenly Constancio decides to completely lose logic and blame low rates on... low rates.

More importantly though, it should be pointed out that for a few decades now we have been witnessing a sort of secular trend towards lower real interest rates. This trend is related to secular stagnation in advanced economies, resulting from a continuous deceleration of total productivity growth and an increase in planned savings accompanied by less buoyant investment prospects. Monetary policy short-term rates are low because of those developments, not the other way around. At the same time, our monetary policy has to be accommodative precisely in order to normalise inflation and growth rates, thereby opening up the possibility of higher interest rates.

Actually, dear Vitor, the only reason there is secular stagnation now is because of the $200 trillion in global debt your policies have enabled: debt, which even McKinsey and the IMF, i.e., very serious institutional participants, admit needs to be washed away for global growth to have even a remote chance.


But the moment Constancio's speech jumped the printer was this:

Furthermore, in the present short-term conditions, with no fiscal room for manoeuvre, it is monetary policy that has the capacity to create the hope that this normalisation will protect savers in the future and improve net margins for banks.

Get this: a VP for a central bank... whose deposit rate is negative... which forces savers to pay the banks for the privilege of holding their cash... is suddenly concerned about "protecting savers."

One couldn't make this up.

The good news is that finally central bankers are scared: otherwise they wouldn't be deflecting public anger from their actions and blaming the "market" - a market which may have existed once upon a time, but in a world with $22 trillion of central bank liquidity is just a fond memory.

Here is to hoping that whatever is scaring these same central planners, finally forces them to admit what has been clear to most for the past 7 years: the money printing emperor has been naked from day one. And to finally leave and never come back, allowing this so-called "market" to return and wipe away 7 years of parasitic policies that have only benefited the top 1% of the population while crushing everyone else.