Done Deal: We’re Making Europe Richer by Making it Poorer, Comrades!
Ready, aim, fire! Draghi reminds everybody that there is no limit to how much fiat weaponry and ammunition he can deploy
Photo credit: François Lenoir / Reuters
We were really surprised at the extent to which the lunacy within the ECB council has apparently expanded. Right along with the euro area’s money supply, it is evidently the fastest growing thing in Europe right now.
According to the ECB, there is “not enough inflation” in the euro area just yet. Hence, it will increase the rate of growth of this mountain of money further by monetizing even more debt – click to enlarge.
A summary from a mainstream press report:
“Eurozone stocks could be gearing up for another rally in the coming months following dovish signals from the European Central Bank.
ECB President Mario Draghi on Thursday said policymakers will decide at their December meeting whether the eurozone economy needs further easing measures. The ECB has already been buying roughly US$60 billion in bonds a month since March in an effort to prop up the 19-member eurozone economy, with plans to continue the program until at least September 2016.
The eurozone economy has modestly grown so far this year, but continues to face risks in the form of low inflation and a slowing economy in China — its second largest trading partner. Draghi last month voiced concerns about the impact China will have on eurozone exports.[…]
The euro notably pulled back Thursday on Draghi’s comments, losing 1.6 per cent against the U.S. dollar to US$1.11. Analysts said the euro could see the kind of sharp decline it experienced prior to the launch of the ECB’s bond-buying program earlier this year.”
The actual statement and Draghi’s press conference suggest that the decision to ease monetary policy further (from the current negative deposit rate combined with printing some 60 billion euro per month in addition to the ongoing expansion of fiduciary media by commercial banks) has already been taken. The time between yesterday’s meeting and the early December meeting is merely going to be used to decide which “tools” to deploy and to what extent. Quite likely this will include further cuts to the already negative 20 basis points rate on the ECB’s deposit facility, and a further expansion of QE.
The absurdity of negative interest rates, or penalty rates as they should actually be called. This is meant to force banks into granting loans they would otherwise not grant, because they simply make no economic sense. It is part of an overall recipe of disaster that is so moronic one is sometimes stumped for words.
It’s All About Their Feelings …
So what has caused this latest display of insanity? After all, the euro zone’s aggregate economic data look better than they have in quite some time, with several peripheral countries specifically showing quite strong growth rates (their growth is stronger than that in the rest of Europe because they were actually forced to implement a handful of timid reforms). Even from a central planner’s perspective, there seems little that is worth “fixing”.
As it turned out, it’s all about feelings. Bad things “might” happen, Draghi essentially averred. Sentiment may become worse. “Uncertainty” may increase. Similar to Ms. Yellen, he mentioned submerging markets, especially China, as potential sources of trouble. And he couldn’t keep from forwarding the utterly absurd argument that lower oil prices are somehow bad for one of the world’s largest importers and consumers of oil, because they might “lower inflation expectations”.
Mind, we are not arguing that things would magically improve if some other, “better” central planner were to take his place. First of all, the people making careers in monetary bureaucracies are as a rule an in incestuous group – nearly all of them have been indoctrinated with the same Keynesian, statist propaganda masquerading as economic science at the same universities. None of them have ever held what is colloquially known as a “real job”, i.e., they have no real-word economic experience. Nevertheless, we still enjoy pointing out what an insufferable high IQ moron the man actually is.
Naturally, Draghi also proposed that the ECB should follow the trail blazed by the BoJ and make Europe richer by making it poorer – by means of an all-out assault on the currency. Leaving aside the fact that the mercantilist obsession with the balance of trade is long refuted economic nonsense as well, he should perhaps have taken the time to look at the most recent evidence of “success” Japan has enjoyed as a result of the weak yen policy.
Ever since the yen has been weakened, Japan’s balance of trade has been consistently negative – precisely the opposite of what the policy was supposed to “achieve”. Most recently, export growth expectations were once again greatly disappointed.
Evidently though, neither sound economic theory nor empirical evidence can alter the bizarre conviction of modern-day central bankers that the economy as a whole can somehow benefit from currency debasement. The fact that they are destroying the real incomes of consumers in the process seems not to figure in their deliberations. A pox on their houses.
The euro vs. the US dollar, daily – the currency promptly reacted by going into free-fall mode. In one fell swoop, European consumers have lost half of the tiny gain in purchasing power that has accumulated in the span of many months – click to enlarge.
So what is it about the euro that is bothering Draghi and his colleagues so much? How big was its recent gain, all told? Here is a longer term chart of EUR-USD:
EUR-USD, monthly. In recent months, the euro has simply stopped free-falling, putting together a bounce that is barely perceptible on a monthly chart. That was enough to get Draghi and the ECB council to worry about too much “euro strength”! It is really hard to believe this – click to enlarge.
The Certain Result
What is certain beyond doubt is only this: the threat of more currency debasement by the ECB has already exacerbated the severe mispricing of assets in financial markets. The end result will be even greater losses for investors, banks and insurers. For the economy as a whole, the amplitude of the current boom-bust sequence is going to become even larger than would have been the case otherwise. Yields on short term government bonds are plunging ever deeper into negative territory, which in turn leads to wider mispricing of financial assets, specifically causing bubbles in so-called “risk assets” and ultimately distorting prices in the entire economy.
Germany’s 2 year government note yield is plunging ever deeper into negative territory. After the ECB announcement it ended below minus 30 basis points, guaranteeing losses for lenders to Germany’s government. This severe mispricing of “risk-free” yields is distorting prices in the entire economy. It eggs on a huge bubble in “risk assets” that will produce misery all around when it bursts – click to enlarge.
The misallocation of scarce capital caused by this is actually the essence of the so-called “economic growth” currently recorded in aggregate economic data in the euro area. It is malinvestment and capital consumption masquerading as growth, as companies spend what are ultimately illusory accounting profits – profits that will disappear in a flash once the current boomlet inevitably turns into bust again.
We must admit that we have underestimated the speed with which the brain trust running the ECB would lose what little was left of its mind. We actually expected Ms. Yellen to blink first (although one could well argue that she did, considering the September FOMC statement and press conference).
The obsession with foreign trade and so-called “price stability” (in slightly Orwellian fashion, a loss of purchasing power of 2% per year is called “stability” by the planners) is all the more astounding if one considers what enormous economic and political catastrophes it has caused in the past. For instance, the “stabilizers” were fully responsible for the boom that eventually morphed into the Great Depression. As Friedrich Hayek noted in the revised English edition of his late 1920s monograph Monetary Theory and the Trade Cycle:
“We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”
Almost 90 years later, the advice of the “stabilizers” still informs monetary policy, with the same results. It is truly maddening.
To our great detriment, Hayek’s assessment of the Fisherian “price stability” policy in the late 1920s continues to be ignored. We can conclude that economic science has regressed in many important areas.
Photo credit: GettyImages
Charts by: ECB, Bonner and Partners, StockCharts, BigCharts