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For the last year or two, European banks have engaged in the ultimate of self-referential M.A.D. trades – buying the sovereign debt of their own nation in inordinate size to maintain the ECB’s illusion of control (even as their economies collapse and stagnate) while referentially obtaining the funding for said purchase from the ECB by repoing the purchase back to the central bank, usually with no haircut to mention. Today though, as The FT reports, a top official at the European Central Bank has signalled it will try to force eurozone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
This is a problem as banks assume zero risk-weights (under BIS III) to these “assets” as they swap them for cash with the ECB and, as Praet notes, if sovereign bonds were treated “according to the risk that they pose to banks’ capital” during the health check, then lenders would be less likely to use central bank liquidity to buy yet more government debt.
A top official at the European Central Bank has signalled it will try to force eurozone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
the central bank could combine its new powers as chief banking regulator with its existing role as currency issuer to toughen up the requirements on sovereign bonds, which have been traditionally classed as risk-free.
Mr Praet said if sovereign bonds were treated “according to the risk that they pose to banks’ capital” during the health check, then lenders would be less likely to use central bank liquidity to buy yet more government debt.
The vicious cycle that has seen banks use central bank cash to buy government bonds has been partly blamed for prolonging the eurozone financial crisis.
But do not worry – should this decision to force banks to hold more capital against their massive sovereign bond books backfire (though credit creation is already dismal), the ECB will save the day…
If the health check were to choke off lending to eurozone households and businesses then the ECB would provide another round of cheap loans, Mr Praet said.
He said monetary policy would be used “without hesitation” if the ECB’s data on money and credit showed banks were continuing to shrink their loan books. The ECB would ensure any liquidity was used to spur lending to the real economy by attaching tougher requirements to banks’ holdings of sovereign debt.
And ever the optimist,
“Perhaps paradoxically, a rigorous AQR and stress test helps monetary policy [function],” Mr Praet said.
but the kicker is…
“Should the procyclical impact of the AQR be significant, then monetary policy would be able to act – without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011-2012 [three-year long term refinancing operations] would be minimised.”
Though it appears to us that the “side effects” of massive liquidity-driven demand for the bonds of the distressed nations smashing their risk to record lows while the economies of those nations languishes – is exactly what they wanted…
So again – it comes back to their reliance on the ECB’s “we’ll collateralize any-old-shit at Par” programs, its unintended consequence of driving the banks and the sovereigns even more symbiotically intertwined, and its inept belief that the stress tests to be undertaken next year will solve all the problems…
Wondering why the Italian bond market has been stable and “improving” in recent months, with yields relentlessly dropping as a mysterious bidder keeps waving it all in despite the complete political void in the government and what may be months of uncertainty for the country, and despite both PIMCO and BlackRock recently announcing they are taking a pass on the blue light special offered by BTPs? Simple. As the Bank of Italy reported earlier today, total holdings of Italian bonds by Italian banks hit an all time record of €351.6 billion in February.
Why are local banks loaded to the gills in the very security that may and will blow up their balance sheets when the ECB loses control of the European sovereign risk scene as it tends to do every year? Because courtesy of ECB generosity, Italian debt continues to be “cash good collateral” with the ECB, and as a result Italian banks can’t wait to pledge and repo it with Mario Draghi in exchange for virtually full cash allottment.
In other words, the more debt the Italian Tesoro issues, the more fungible cash the Italian banks have to spend on such things as padding up their cap ratios and making their balance sheets appear like medieval (any refernce to Feudal Europe is purely accidental) fortresses.
Until – the ECB changes the rules…
Yannos Papantoniou warns that the widening economic gap between the eurozone’s northern and souther members could lead to the monetary union’s collapse. – Project Syndicate
ATHENS – As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?
While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.
Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.
But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.
Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.
While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.
As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.
As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change. Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.
For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.
But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.
Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.
The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.
Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.
Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.
Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.
When it comes to reckless money creation, it turns out that China is the king. Over the past five years, Chinese bank assets have grown from about 9 trillion dollars tomore than 24 trillion dollars. This has been fueled by the greatest private debt binge that the world has ever seen. According to a recent World Bank report, the level of private domestic debt in China has grown from about 9 trillion dollars in 2008 to more than 23 trillion dollars today. In other words, in just five years the amount of money that has been loaned out by banks in China is roughly equivalent to the amount of debt that the U.S. government has accumulated since the end of the Reagan administration. And Chinese bank assets now absolutely dwarf the assets of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England combined. You can see an amazing chart which shows this right here. A lot of this “hot money” has been flowing out of China and into U.S. companies, U.S. stocks and U.S. real estate. Unfortunately for China (and for the rest of us), there are lots of signs that the gigantic debt bubble in China is about to burst, and when that does happen the entire world is going to feel the pain.
It was Zero Hedge that initially broke this story. Over the past several years, most of the focus has been on the reckless money printing that the Federal Reserve has been doing, but the truth is that China has been far more reckless…
You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!
Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!
I was curious to see what all of this debt creation was doing to the money supply in China. So I looked it up, and I discovered that M2 in China has grown by about 1000% since 1999…
So what has China been doing with all of that money?
Well, they have been on a buying spree unlike anything the world has ever seen before. For example, according to Reuters China has essentially bought the entire oil industry of Ecuador…
China’s aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.
Last November, Marco Calvopiña, the general manager of Ecuador’s state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador’s oil to Chinese state-run firms through 2020, dragged on for days.
And the Chinese have been doing lots of shopping in the United States as well. The following is an excerpt from a recent CNBC article entitled “Chinese buying up California housing“…
At a brand new housing development in Irvine, Calif., some of America’s largest home builders are back at work after a crippling housing crash. Lennar, Pulte, K Hovnanian, Ryland to name a few. It’s a rebirth for U.S. construction, but the customers are largely Chinese.
“They see the market here still has room for appreciation,” said Irvine-area real estate agent Kinney Yong, of RE/MAX Premier Realty. “What’s driving them over here is that they have this cash, and they want to park it somewhere or invest somewhere.”
Apparently a lot of these buyers have so much cash that they are willing to outbid anyone if they like the house…
The homes range from the mid-$700,000s to well over $1 million. Cash is king, and there is a seemingly limitless amount.
“The price doesn’t matter, 800,000, 1 million, 1.5. If they like it they will purchase it,” said Helen Zhang of Tarbell Realtors.
So when you hear that housing prices are “going up”, you might want to double check the numbers. Much of this is being caused by foreign buyers that are gobbling up properties in certain “hot” markets.
We see this happening on the east coast as well. In fact, a Chinese firm recently purchased one of the most important landmarks in New York City…
Chinese conglomerate Fosun International Ltd. (0656.HK) will buy office building One Chase Manhattan Plaza for $725 million, adding to a growing list of property purchases by Chinese buyers in New York city.
The Hong Kong-listed firm said it will buy the property from JP Morgan Chase Bank, according to a release on the Hong Kong Stock Exchange website.
Chinese firms, in particular local developers, have looked overseas to diversify their property holdings as the economy at home slows. Chinese individuals also have been investing in property abroad amid tight policy measures in the mainland residential market.
Earlier this month, Chinese state-owned developer Greenland Holdings Group agreed to buy a 70% stake in an apartment project next to the Barclays Center in Brooklyn, N.Y., in what is the largest commercial-real-estate development in the U.S. to get direct backing from a Chinese firm.
And in a previous article, I discussed how the Chinese have just bought up the largest pork producer in the entire country…
Just think about what the Smithfield Foods acquisition alone will mean. Smithfield Foods is the largest pork producer and processor in the world. It has facilities in 26 U.S. states and it employs tens of thousands of Americans. It directly owns 460 farms and has contracts with approximately 2,100 others. But now a Chinese company has bought it for $4.7 billion, and that means that the Chinese will now be the most important employer in dozens of rural communities all over America.
For many more examples of how the Chinese are gobbling up companies, real estate and natural resources all over the United States, please see my previous article entitled “Meet Your New Boss: Buying Large Employers Will Enable China To Dominate 1000s Of U.S. Communities“.
But more than anything else, the Chinese seem particularly interested in acquiring real money.
And by that, I mean gold and silver.
In recent years, the Chinese have been buying up thousands of tons of gold at very depressed prices. Meanwhile, the western world has been unloading gold at a staggering pace. By the time this is all over, the western world is going to end up bitterly regretting this massive transfer of real wealth.
Unfortunately for the Chinese, it appears that the unsustainable credit bubble that they have created is starting to burst. According toBloomberg, the amount of bad loans that the five largest banks in China wrote off during the first half of this year was three times larger than last year…
China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.
And Goldman Sachs is projecting that China may be facing 3 trillion dollars in credit losses as this bubble implodes…
Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”
Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.
The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.
The Chinese are trying to get this debt spiral under control by tightening the money supply. That may sound wise, but the truth is that it is going to create a substantial credit crunch and the entire globe will end up sharing in the pain…
Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.
The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.
This could ultimately be a much bigger story than whether or not the Fed decides to “taper” or not.
It has been the Chinese that have been the greatest source of fresh liquidity since the last financial crisis, and now it appears that source of liquidity is tightening up.
So as the flow of “hot money” out of China starts to slow down, what is that going to mean for the rest of the planet?
And when you consider this in conjunction with the fact that China has just announced that it is going to stop stockpiling U.S. dollars, it becomes clear that we have reached a major turning point in the financial world.
2014 is shaping up to be a very interesting year, and nobody is quite sure what is going to happen next.
The concept of the “liquidity trap” is well-known to most: it is that freak outlier in an otherwise spotless Keynesian plane, when due to the need for negative interest rates to boost the economy (usually resulting from that other inevitable Keynesian state: the bursting of an asset bubble) – a structural impossibility according to most economists although an increasingly more probable in Europe – central banks have no choice but to offset a deleveraging private banking sector and directly inject liquidity into the banking sector with the outcome being soaring asset prices, and even more bubbles which will eventually burst only to be replaced with even more failed attempts at reflation. Sadly, very little of this liquidity makes its way to the broad economy as the ongoing recession in the developed world has shown for the 5th year in a row, which in turn makes the liqudity trap even worse, and so on in a closed loop.
Since there is little else in the central bankers’ arsenal that is as effective in boosting the “wealth effect” – which is how they validate their actions to themselves and other economists and politicians – they continue to do ever more QE. And since banks are assured at generating far greater returns on allocated capital in the markets, where they can use the excess deposits they obtain courtesy of the Fed’s generous reserve-a-palooza as initial margin for risk-on trades, the liquidity pipelines remain stuck throughout the world, and loan creation – that traditional money creation pathway – is permanently blocked (as is the case empirically in both the US and Europe, where private-sector loan creation is declining at a record pace).
Everywhere except the one place that has yet to actually engage in conventional quantitative easing: China. At least explicitly, because loan creation by China’s state-controlled entities and otherwise government backstopped banks, is anything but conventional money creation. One can, therefore, claim that China’s loan creation is a form of Quasi-QE whereby banks, constrained from investing in a relatively shallow stock market, and unable to freely transfer the CNY-denominated liquidity abroad, are forced to lend it out knowing that if things turn soure at the end of the day, the PBOC will bail them out. Paradoxically, this “non-QE” is exactly how QE should work in the US and other developed markets.
That’s the long story.
The short story is far simpler.
In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.
How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!
And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.
Submitted by Dr. Frank Shostak, via The Cobden Centre blog,
According to the popular way of thinking, bubbles are an important cause of economic recessions. The main question posed by experts is how one knows when a bubble is forming. It is held that if the central bankers knew the answer to this question they might be able to prevent bubble formations and thus prevent recessions.
On this, at the World Economic Forum in Davos Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression. The key identifying points of a typical bubble according to Shiller, are,
- Sharp increase in the price of an asset.
- Great public excitement about these price increases.
- An accompanying media frenzy.
- Stories of people earning a lot of money, causing envy among people who aren’t.
- Growing interest in the asset class among the general public.
- New era “theories” to justify unprecedented price increases.
- A decline in lending standards.
What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key factors that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. A definition is meant to tell us what the fundamentals or the origins of a particular entity are. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. They tell us nothing as to why bubbles are bad for economic growth. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it. Without an understanding of the causes of an event it is not possible to counter its emergence.
Now if a price of an asset is the amount of money paid for the asset it follows that for a given amount of a given asset an increase in the price can only come about as a result of an increase in the flow of money to this asset.
The greater the expansion of money is, the higher the increase in the price of an asset is going to be, all other things being equal. We can also say that the greater the expansion of the monetary balloon is, the higher the prices of assets are going to be, all other things being equal. The emergence of a bubble or a monetary balloon need not be always associated with rising prices – for instance if the rate of growth of goods corresponds to the rate of growth of money supply no change in prices will take place.
We suggest that what matters is not whether the emergence of a bubble is associated with price rises but rather with the fact that the emergence of a bubble gives rise to non-productive activities that divert real wealth from wealth generators. The expansion of the money supply, or the monetary balloon, in similarity to a counterfeiter, enables the diversion of real wealth from wealth generating activities to non productive activities.
As the monetary pumping strengthens, the pace of the diversion follows suit. We label various non-productive activities that emerge on the back of the expanding monetary balloon as bubble activities – they were formed by the monetary bubble. Also note that these activities cannot exist without the expansion of money supply that diverts to them real wealth from wealth generating activities.
From this we can infer that the subject matter of bubbles is the expansion of money supply. The key outcome of this expansion is the emergence of non wealth generating activities.
It follows that a bubble is not about strong asset price increases but about the expansion of money supply. In fact, as we have seen, bubbles – i.e. an increase in money supply – can take place without a corresponding increase in prices. Once we have established that an expansion in money supply is what bubbles are all about, we can further infer that the key damage that bubbles generate is by setting non-productive activities, which we have labelled as bubble activities. Furthermore, once it is established that formation of bubbles is about the expansion in money supply, obviously it is the central bank and the fractional reserve banking that are responsible for the formation of bubbles. As a rule, it is the central bank’s monetary pumping that sets in motion an expansion in the monetary balloon.
Hence to prevent the emergence of bubbles one needs to arrest the monetary pumping by the central bank and to curtail the commercial banks’ ability to engage in fractional reserve banking – i.e. in lending out of “thin air”. Once the pace of monetary expansion slows down in response to a tighter central bank stance or in response to commercial banks slowing down on the expansion of lending out of “thin air” this sets in motion the bursting of the bubbles. Remember that a bubble activity cannot fund itself independently of the monetary expansion that diverts to them real wealth from wealth generating activities. (Again bubble activities are non-wealth generating activities).
The so-called economic recession associated with the burst of bubble activities is in fact good news for wealth generators since now more wealth is left at their disposal. (An economic bust, which weakens bubble activities, lays the foundation for a genuine economic growth). Note again that it is the expansion in the monetary balloon that gives rise to bubble activities and not a psychological disposition of individuals in the market place.
Psychology and economics
Psychology was smuggled into economics on the grounds that economics and psychology are inter-related disciplines. However, there is a distinct difference between economics and psychology. Psychology deals with the content of ends. Economics, however, starts with the premise that people are pursuing purposeful conduct. It doesn’t deal with the particular content of various ends.
According to Rothbard,
A man’s ends may be “egoistic” or “altruistic”, “refined” or “vulgar”. They may emphasize the enjoyment of “material goods” and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.
Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?
Therefore, economics deals with any given end and with the formal implications of the fact that men have ends and utilize means to attain these ends. Consequently, economics is a separate discipline from psychology. By introducing psychology into economics one obliterates the generality of the theory, and renders it useless. The use of psychology is counterproductive as far as economic analyses are concerned.
Summary and conclusions
Contrary to Shiller, in order to establish that a bubble is forming we don’t need to apply the same methodology employed by psychologists. What we require is the establishment of a correct definition of what bubbles are all about. Once it is done, one discovers that bubbles have nothing to do with some kind psychological malfunction of individuals – they are the result of loose monetary policies of the central bank.
Furthermore, once we observe an increase in the rate of growth of money supply we can confidently say that this sets the platform for bubble activities – for an economic boom.
Conversely, once we observe a decline in the rate of growth of money supply we can confidently say that this lays the foundations for the burst of bubble activities – an economic bust.
This country will die. History will record the cause as due to an event worse than the Great Depression. That diagnosis will be wrong.
Economies do not die except when they are murdered. Free markets are self-equilibrating, healing themselves unless they are prevented from doing so.
The very purpose of government intervention is to produce outcomes that otherwise would not occur. Intervention is always an attempt to overcome the natural equilibrium at which an economy would settle. Its very purpose is to thwart the intentions of individuals who make up the economy. Intervention is intended to alter the natural healing process.
Every so-called “economic” problem can be traced back to prior political intervention(s). Political actions deemed necessary today result from damages inflicted by prior government interventions.
Damages and distortions are cumulative. Once begun, politicians are unable/unwilling to stop intervening as the pain of allowing the economy to return to equilibrium increases with each intervention. Eventually an economy’s ability to grow and recuperate is impaired:
- Prices become inflated and distorted by liquidity and regulatory interventions. They no longer reflect true supply and demand.
- Capital is mis-allocated as a result of false interest rate signals. Eventually this capital is seen as unprofitable and is abandoned.
- Cheap lending and low lending standards encourage imprudent and eventually unsustainable levels of debt.
These distortions decrease an economy’s efficiency. General economic metrics like GDP eventually grow more slowly as a result, prompting calls for more political intervention. Eventually the distortions and disincentives grow to a point where standards of living and economies stagnate and then retrogress.
These relationships are as old as civilization itself. Politicians know, but they find it politically advantageous to ignore. The political class believes itself to be superior and entitled. They consider themselves to be above the law. For them, citizens are sources of plunder, to be exploited so that they may hold onto power and wealth.
The economic crisis is coming. It will occur because feckless, venal “leaders” consider the personal cost of stopping their actions to be greater than continuing. That may be true for them, but it is not true for the country.
Sadly, much of the electorate is as corrupt as the political class as Angelo M. Codevilladiscusses below. The economic collapse is inevitable. It may also be deserved.
Democracy has no cure for a corrupt demos. Politicians’ misdeeds taint them alone, so long as their supporters do not embrace them. But when substantial constituencies continue to support their leaders despite their having broken faith, they turn democracy’s process of mutual persuasion into partisan war.
Consider: In 1974 President Richard Nixon lied publicly and officially to cover up his subordinates’ misdeeds. His own party forced him to resign. In 1998 President Bill Clinton lied under oath in an unsuccessful attempt to cover up his own. But his party rallied around him and accused his accusers. In 2013 President Barack Obama lied publicly and officially to secure passage of his most signature legislation. But when the lies became undeniable, his party joined him in maintaining that they had not been lies at all.
The point is that Nixon’s misdeeds harmed no one but himself because no one excused them. But Clinton’s and Obama’s misdeeds contributed to the corruption of American democracy because a substantial part of the American people chose to be partners in them.
The difference between the mentalities of Republicans circa 1974 and of Democrats twenty-five and forty years later is the difference between a society before and after democratic corruption. Forty years ago, just as in our time, the President of the United States headed a coalition of groups with material and ideological interest in his Administration. But, back then, the beneficiaries of power were willing enough to subordinate their interests to the greater good of maintaining the bounds of democratic partisanship. In our time, however, the constituents of Democratic Administrations so identify their own status and benefits with “the greater good” that the very notion of bounds to their own partisanship makes no sense.
Today’s Democrats argue that, some deceptive language aside, President Obama had every right to implement his view of medical care for America, as well as other things, because he was elected twice having promised something of the sort. But, in 1974, Republicans could have argued that Nixon had been elected twice, the second time by the largest margin in US history, specifically to undo the 1960s. In fact, Nixon’s lies about what he knew of his subordinates’ misdeeds were entirely irrelevant to the purpose for which he had been elected. Why should the Republican constituencies who had worked so hard have given up on the Nixon Administration? Why did Barry Goldwater, Mr. conservative himself, go to the White House to tell Nixon he had to resign?
Quite simply because he knew – everyone seemed to know, then – that respect for the truth is what enables a democratic society that resolves its differences by mutual persuasion, and that absent that respect society devolves into civil war. Nixon’s lie had not imperiled the workings of American government. But it had transgressed the essential principle. Thenceforth, no one could take him at his word. All would have to regard him as acting for himself or his party, alien to the rest. And if his party stuck with him, the rest of America would have to regard that party as alien.
Bill Clinton’s 1998 lie under oath, and then on national television proved so by DNA analysis of his own sperm, placed him precisely in Nixon’s position. But his party, by sticking with him, reversed the essential principle to which the Republicans of 1974 had adhered. Its constituencies had worked hard to reverse Ronald Reagan’s 1980s. They had raised taxes, institutionalized abortion, and vastly expanded government. By this time, they had convinced themselves that the rest of America is composed of inferior people. Why should they have jeopardized their position just because their man had fellatio in the Oval Office and lied about it?
Thus by placing their own material and ideological interests above the truth, the Democrats took upon themselves a license to lie – not just about personal matters, which was their argument at the time – but about whatever might serve their purpose.
Obama’s premeditated, repeated, nationally televised lies about the “Affordable Care Act” are integral, indeed essential, to his presidency and to the workings of the US government. The outcome of two national elections depended on it.
Even more significant is his contention that he never said what he said, and that what he said was true anyhow. In interpersonal relations, such a contention is an insult that makes civility impossible; because to continue to treat with someone who makes such affronts is self-degradation of which few are capable. In political life, such an insult is a declaration of war.
The deadly problem is that Barack Obama is not just an individual, nor even the head of the US government’s executive branch. He is the head of the party to which most government officials belong, the party of the media, of the educational establishment, of big corporations – in short of the ruling class. That class, it seems, has so taken ownership of Obama’s lies that it pretends that those who are suffering from the “Affordable Care Act” don’t really know what is good for them, or that they are perversely refusing to suffer for the greater good.
This class, in short, has placed itself as far beyond persuasion as Obama himself. Democracy by persuasion having become impossible, we are left with democracy as war.
Despite the ECB’s recent “stunning” rate cut, which sent the EUR modestly lower by a few hundred pips, the resultant resurge in the European currency has left the European Central Bank even more stunned: just what does it have to do to force its currency lower and boost Europe’s peripheral economies, especially in a world in which every other major central banks is printing boatloads of money each and every month?
We hinted at precisely what the next steps will be two days ago when in “Next From The ECB: Here Comes QE, According To BNP” we said “BNP is ultimately correct as the European experiment will require every weapon in the ECB’s arsenal, and sooner or later the ECB, too, will succumb to the same monetary lunacy that has gripped the rest of the developed world in the ongoing “all in” bet to reflate or bust. All logical arguments that outright monetization of bonds are prohibited by various European charters will be ignored: after all, there is “political capital” at stake, and as Mario Draghi has made it clear there is no “Plan B.” Which means the only question is when will Europe join the lunaprint asylum: for the sake of the systemic reset we hope the answer is sooner rather than later.”
Two days later the answer just appeared when moments ago the WSJ reported that the ECB’s Praet hinted more QE is, just as we predicted, on the table.
The European Central Bank could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them.
“If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That’s a very clear signal,” ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal. Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank’s target of just below 2% over the medium term.
He didn’t rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. “The balance-sheet capacity of the central bank can also be used,” said Mr. Praet, whose views carry added weight as he also heads the ECB’s powerful economics division. “This includes outright purchases that any central bank can do.”
The ECB could do more if necessary, Mr. Praet said. “On standard measures, interest rates, we still have room and that would also include the deposit facility,” he said. The central bank’s deposit rate has been set at zero for several months. Making it negative would effectively levy a fee on commercial banks that park funds at the ECB.
The ECB purchased safe bank bonds and government bonds at the height of the global financial crisis and the euro debt crisis, but in small amounts compared with other major central banks.
Of course, there are some legal hurdles:
The ECB’s charter forbids it from financing governments.
But, wily as always, the ECB appears to have found a loophole:
The ECB must respect its legal constraints, Mr. Praet said, however its rules “do not exclude that you intervene in the markets outright.”
And sure enough, the Euro tumbles just as mandated by the ECB’s talking head: let’s see if it actually stays lower this time.
And now check to the Germans, who will be positively giddy that first Europe accused it of unfair export-led growth, and now the ECB is openly contemplating tearing off the Weimar scab.
Looks like things in Europe are about to get exciting all over again.
The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth.
The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”
A customer selects two hundred denomination Czech koruna currency notes from her wallet in Prague, Czech Republic. Photographer: Martin Divisek/Bloomberg
Nov. 11 (Bloomberg) — Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, talks about the U.S. and the Australian dollars, and global trading strategy. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move.” (Source: Bloomberg)
Nov. 11 (Bloomberg) — Peter Rosenstreich, head of market strategy at Swissquote Bank SA, talks about the outlook for the Australian dollar and the U.S. dollar. He spoke Nov. 8 from Geneva. (Source: Bloomberg)
A pedestrian passes advertisements for koruna currency coins in Prague. The Czech National Bank drove its koruna down by 4.4 percent versus the euro on Nov. 7, the most since the single currency’s creation in 1999, when it intervened to spur inflation. Photographer: Bartek Sadowski/Bloomberg
The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega, seen here, in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.” Photographer: Peter Foley/Bloomberg
“It’s a very real concern of these countries to keep their currencies weak,” Axel Merk, who oversees about $450 million of foreign exchange as the head of Palo Alto, California-based Merk Investments LLC, said in a Nov. 8 telephone interview. ECB President Mario Draghi, “persistently since earlier this year, has been trying to talk down the euro,” Merk said.
With the outlook for the global economy being downgraded by the International Monetary Fund and inflation slowing to levels that may hinder investment, countries and central banks are revisiting policies that tend to boost competitiveness through weaker currencies.
The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.”
“We’re seeing a new era of currency wars,” Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in a Nov. 8 telephone interview.
The ECB lowered its benchmark rate on Nov. 7 by a quarter-point to a record 0.25 percent, a reduction anticipated by just three of 70 economists in a Bloomberg survey. Draghi said the cut was to reduce the risk of a “prolonged period” of low inflation and the euro’s strength “didn’t play any role” in the decision. Euro-region consumer-price inflation has remained below the ECB’s 2 percent ceiling for the past nine months.
The euro slumped as much as 1.6 percent against the dollar on the day of the rate cut, the most in almost two years, before ending the week at $1.3367. It rose 0.2 percent today to $1.3390 at 10:01 a.m. in London.
The shared currency pared gains versus a basket of nine developed-market peers this year to 5.6 percent, from as much as 7.2 percent at its Oct. 29 peak, Bloomberg Correlation-Weighted Indexes show.
“There are places in the world where economies are generally quite weak, where inflation is already low,” Alan Ruskin, global head of Group-of-10 foreign exchange in New York at Deutsche Bank AG, the world’s largest currency trader, said in a Nov. 8 phone interview. “Japan was in that mix for 20-odd years. Nobody wants to go there” and “the talk from Draghi shows they’re taking the disinflation story very seriously. The Czech Republic is the same story.”
The Czech National Bank’s drove its koruna down by 4.4 percent versus the euro on Nov. 7, the most since the single currency’s creation in 1999, when it intervened to spur inflation. Governor Miroslav Singerpledged to keep selling koruna “for as long as needed” to boost growth.
The IMF last month cut its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent and 3.8 percent. It also sees inflation in developed economies remaining short of the 2 percent rate favored by most central banks.
Growth in global trade may slow to 2.5 percent in 2013, the new head of the World Trade Organization said after a Sept. 5-6 summit of G-20 nations in St. Petersburg, Russia, down from the organization’s previous estimate in April of 3.3 percent. Even so, the G-20 participants agreed to “refrain from competitive devaluation” and not “target our exchange rates for competitive purposes.”
“The idea that central banks are setting policies to weaken their currencies has always been overstated,” Adam Cole, Royal Bank of Canada’s head of G-10 currency strategy in London, said in a Nov. 8 phone interview. “In most cases they’re happy to see their currencies fall, but they’re not going out of their way to induce weakness.”
German airline Deutsche Lufthansa AG cited the strong euro last month when its profit estimate fell short of analysts’ forecasts, while French luxury-goods maker LVMH Moet Hennessy Louis Vuitton SA said on Oct. 16 that the currency’s gains versus the dollar and Japanese yen shaved 6 percent off third-quarter revenue.
Lufthansa said on Oct. 22 this year’s operating profit will be 600 million euros to 700 million euros, below an estimate of about 918 million euros by analysts surveyed by Bloomberg.LVMH, whose Louis Vuitton brand’s founder built his reputation as a luggage-maker for the wife of Napoleon III, said it has hedged 90 percent of its euro-yen exposure for this year and about 66 percent for next year.
“Do I think the euro-zone central bank wanted to engage in a currency war?” Lane Newman, a director of foreign exchange at ING Groep NV in New York, said in a Nov. 8 phone interview. “I think, post facto, yes. Because they cut rates knowing it was going to put the euro on the back foot.”
While the ECB hasn’t said it’s explicitly targeting the euro, comments from policy makers signal they consider exchange rates in their decisions. An ECB spokesman declined to comment when contacted on Nov. 8.
“As you know, the exchange rate is not a policy target for the ECB,” Draghi said at a press conference on Oct. 2. “The target for the ECB is medium-term price stability. However, the exchange rate is important for growth and for price stability. And we are certainly attentive to these developments.”
At the same time the ECB is easing, the U.S. Federal Reserve said it will keep printing enough dollars to buy $85 billion of bonds each month because the economy is still too weak to stand on its own. The Bank of Japan is also employing a policy of quantitative easing.
Reserve Bank of New Zealand Governor Graeme Wheeler has cited the risk of slow inflation and currency gains as reasons for not raising the nation’s official cash rate from a record-low 2.5 percent this year. That’s even with the need to tackle what he has described as an overheated housing market. The kiwi rose 4.5 percent in the past four months, Bloomberg Correlation Indexes show.
Australia’s dollar is 27 percent overvalued against the greenback, according to a gauge of purchasing-power parity compiled by the Paris-based Organization for Economic Cooperation and Development.
The Reserve Bank of Australia lowered its growth estimate for next year to 2 percent to 3 percent, compared with 2.5 percent to 3.5 percent three months ago. South Korea’s finance ministry said last month it may act to counter “herd behavior” in the currency, as the Bank of Korea lowered its outlook for the economy.
The Fed said in October it needed to see more evidence of a U.S. recovery before it trims the Treasury and mortgage-bond purchases it uses to pump money into the financial system.
Analysts surveyed by Bloomberg last week predicted the Fed would delay tapering until March even though a Labor Department report on Nov. 8 showing employers added a larger-than-forecast 204,000 workers in October.
“People aren’t as content as they once were about being on the end of dollar weakness, and hence an appreciation of their own currencies,” Bank of New York’s Mellor said. “We’ve had a change in tone from South Korea, Australia and New Zealand.”
Perhaps it is not surprising that with the absolute majority of economists and strategists, or 67 of 70, predicting no rate cut by the ECB, this is exactly what the ECB just did, when in a stunning move it cute rates for both the main refi rate and the marginal lending facility by 25 bps, to 0.25% and 0.75% respectively. And there is your reaction to Europe’s encroaching deflation.
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.25%, starting from the operation to be settled on 13 November 2013.
The interest rate on the marginal lending facility will be decreased by 25 basis points to 0.75%, with effect from 13 November 2013.
The interest rate on the deposit facility will remain unchanged at 0.00%.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
The Euro will need a bigger chart to show just how far it tumbled as a result of the stunner:
But… But… that MNI source yesterday said…
Europe Stuns With “Surprising” Record High Unemployment Print, Inflation At 4 Year Low; Euro Tumbles | Zero Hedge
Broken down by country:
And yes, that sudden housing mecca for all rental condo flippers, Spain, was just found to also have a record high unemployment rate of 26.6%. So much for that.
But the worst print for Europe is not in any of the above charts or tables, but is and has always been its youth unemployment, as an entire generation is unable to find a productive life. In this case, the EA17 Under 25 unemployment just rose to a new record high 24.1%, from 24.0% in August, driven by Spain at 56.5%, Cyprus 43.9% (was 28.0% a year ago – thanks template), Portugal at 36.9%, and Greece somewhere in the 58% ballpark.
Finally, rounding out the abysmal picture was the Euro area’s just reported October CPI, which tumbled to 0.7%Y/Y, down from 1.1% in September and below the 1.1% expected. This was the weakest annual inflation print in the continent since 2009, and is a bright red flag for Draghi that everything he has done so far has failed to stimulate inflation, but at least his precious EUR is at 2 year highs against the dollar. Alas, not for much longer as the time to reprice the European currency has arrived.
End result of all of the above:
And going much lower.