Now Comes The Keynesian Chorus: Martin Wolff And The Monetary Cranks Lip Sync Draghi


“Bankers at the World Economic Forum in Davos are applauding the European Central Bank’s announcement of quantitative easing. Some said they were pleased the ECB’s plan, to buy about €60 billion a month in government bonds, is larger than expected. “It was positive and it was needed,” said Francisco Gonzalez, chairman of Spain’s BBVA. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he added.”


The ECB surprised markets today by unveiling a slightly larger than expected “QE” program. Yesterday’s leak of the decision referred to money printing to the tune of €50 billion per month, so the actual announcement of a €60 billion per month program was seen as a “positive surprise”. Just think about this for a moment. The charlatans running the central bank announce that they will make a grandiose effort to debase their confetti currency even further by printing a huge amount of additional money every month, and this is greeted as a “positive surprise” and is “applauded by bankers”. It should be glaringly obvious by now that the lunatics are running the asylum.



This time it will work! Mr. Draghi unwraps the chief weapon of the John Law School of Economics, which has been failing with unwavering regularity since at least the times of Roman Emperor Diocletian.

Image author unknown



The Charlatans of Inflationism

We know of a number of people who will be pleased (and will probably begin to cry for even more money printing shortly) – among them is Martin Wolf at the Financial Times. This breeding ground of hoary inflationism has been regaling its readers with long discredited (but quite popular) economic balderdash for several years already. Just prior to the ECB announcement, Mr. Wolf wrote the umpteenth editorial exhorting central bankers to print as much money as possible. In his opening salvo, he commented on the SNB’s wise, if belated, decision to finally stop printing unlimited amounts of Swiss francs to shore up the failing euro. Needless to say, this decision did not please Mr. Wolf.


“These are exciting times in European central banking. Last Thursday the Swiss National Bank suddenly terminated its successful peg to the euro. This week the European Central Bank is expected to announce its program of quantitative easing. The SNB has embraced the risk of deflation from which the ECB wishes to escape.


Why end a policy that had delivered such enviable stability? The obvious answer is that the SNB feared huge inflation if it remained pegged to the euro, particularly after QE began — and bigger losses on foreign currency assets the later the peg was dropped. Neither fear is compelling, as Willem Buiter, Citigroup chief economist, argues. It is possible to hold down the value of a currency one creates oneself forever. It is true that the SNB’s balance sheet is already large, at about 85 per cent of gross domestic product. But it had stabilised, and as Mr Buiter notes: “There is no technical limit on the size of the central bank’s balance sheet, in absolute terms or relative to GDP.”


This is a case of one charlatan quoting another to buttress his case. Mr. Buiter, it may be remembered, is the man who went as far as invoking the ideas of utter monetary cranks like Silvio Gesell as possible “solutions” to the crisis of 2008 ff., thereby outing himself as a monetary crank as well. This cannot be put in a more polite manner.

Wolf then launches into a presentation of his “better ideas” – quite typical for armchair central planners who feel the constant urge to dispense advice to monetary bureaucrats. In order to avert all the negative consequences of its interventionism, Wolf believes the SNB should not have stopped intervening, but should instead have adopted a long list of additional interventionist measures, so as to “fix” the “unintended consequences” of the initial intervention. Here is one of them that strikes us as especially despicable and typical of the thinking of the statist mountebanks infesting the mainstream financial press nowadays:


“More interesting would have been a decision to go further in the direction of negative interest rates than the minus 0.75 per cent now imposed.

To make such a move stick, the authorities would have had to place limits on withdrawals from bank accounts or move entirely to electronic money, to prevent people from protecting their purchasing power by moving into cash. Needless to say, such radical ideas would horrify the prudent burghers of Switzerland.”


This idea should “horrify prudent burghers” everywhere, not just in Switzerland and Germany. We have seen the idea of banning cash currency mentioned quite frequently in recent years, and we have little doubt that it is a long term goal of the ruling elite. It would be one of the most tyrannical measures of recent memory. A country implementing such a policy could no longer be called “free” by any stretch of the imagination. Wolf wants cash to be banned so as to make it absolutely impossible for people to protect the purchasing power of their savings, while forcing them to keep their money with fractionally reserved banks (i.e., inherently insolvent institutions), whether they want to or not. What a swell guy.

Regarding the ECB and its then still upcoming QE decision, Wolf explains the alleged necessity of the coming money printing orgy as follows:


“QE is going to horrify the burghers of Germany, too. But it must now happen since it is the only way still available for the ECB to meet its definition of price stability. Its credibility is at stake. So, too, is the eurozone’s economy. Everything is fine in Germany. But Germany is not the eurozone. Everything is less fine elsewhere.

The eurozone is in a slump, afflicted by the “chronic demand deficiency syndrome” that is the world economy’s biggest current weakness. Core inflation is 0.7 per cent, far below the ECB target of “below but close to” to 2 per cent. Five-year inflation expectations have fallen to 1.6 per cent.


(emphasis added)

We have no idea why “core inflation” of 0.7 percent or 5 year inflation expectations are supposed to be “too low”. In fact, we believe it is still too high. In a progressing economy, prices should be falling and the real value of incomes should be rising. It is not clear to us why making people poorer by X% every year is supposed to be a boon (more on this further below).

In any case, money supply growth in the euro area was booming already before the QE announcement, so there certainly is plenty of monetary inflation. As can be seen below, the year-on-year growth rate of the euro area’s true money supply has recently accelerated to almost 7.5%. This is a lot less than the double-digit growth rates that accompanied the dangerous boom that blew up so spectacularly in 2008, but it is more than enough to distort prices across the economy and once again lead to malinvestment on a grand scale. This situation is now set to become even worse.


Euroe Area M1Euro area true money supply (red line), plus year-on-year rate of change (blue line) – click to enlarge.


The so-called “chronic demand deficiency syndrome” is a figment of Mr. Wolf’s overactive imagination. Consumers have nigh endless demand for all sorts of things. There can never be a problem with demand as long as there are still unsatisfied human wants. The members of the elite who are meeting in Davos this week to discuss such pressing non-issues as “global warming”, have reportedly sashayed there on at least 200 privately owned jets. We are willing to wager that many consumers harbor a demand for a privately owned jet. Their problem is not that their demand is somehow “deficient”. Their problem is that they cannot pay for it.

The policy advocated by Wolf – money printing – can not create a single iota of real wealth. It can only bring about an illusory prosperity by inciting more asset bubbles and even more misallocation of scarce capital. In short, it will destroy wealth rather than creating it. Contrary to what Wolf and others of his ilk seem to believe, wealth is not growing through consumption, but production. Consumption is the goal of production, but it cannot possibly precede it. Keynesians like Wolf are constantly putting the cart before the horse.

Good Keynesian that he is, Wolf doesn’t forget to remind us that not only is more money printing required, but also more deficit spending. Never mind that the euro area faced a near terminal crisis a mere three years ago due to its burgeoning government debt! He does however mention what strikes us as an interesting idea in his final sentence:


Similarly, the resolute opposition of the German establishment to fiscal deficits even when the yield on its own 30-year bonds is 1.1 per cent — virtually free money — hampers the use of fiscal policy throughout the eurozone. The emphasis on the wickedness of debt, regardless of what it costs, is pathological. No other adjective will do.

It is all up to the ECB. It may well fail, not because it is too independent but because it is not independent enough. Similarly, the euro zone may fail, not because of irresponsible profligacy but rather because of pathological frugality. In the end, the ECB must try to do its job. If Germany cannot stand that, it may need to consider its own Swiss exit.


(emphasis added)

So let us get this straight: the euro zone almost blew up in an intractable systemic crisis because market participants realized that there exists no honest way of repaying the public debt that has been amassed. Only by printing money can “confidence” in the ability to support this debt be maintained, i.e., by erecting a Potemkin village of paper claims that is bound to eventually being blown away by a strong gust of wind from the continuum commonly referred to as “reality”.

Germany’s insistence to bring this debt under control is somehow “pathological”? Does Wolf really believe that actors in the economy can be conned with monetary parlor tricks forever and ever? Besides, what evidence is there for “frugality” in euro-land? Euro zone public debt has continued to hit new record highs every year and the debts and deficits of the great majority of member countries are light years from the limits theoretically imposed by the Maastricht treaty.

Lastly, Germany should indeed ponder an exit from the euro area. It does get an export subsidy out of the euro, but frankly, it doesn’t need one. People all over the world would no doubt continue to buy German goods without it. We bet they are not sufficiently “demand deficient” just yet to abandon their desire for the products of German engineering. However, if Germany were to exit the euro zone, who would bail out all the deadbeats? Santa Claus?

We’d actually love to see how a euro-zone without Germany would “work”. Keep in mind that if Germany were to exit, it would be followed within a few days or weeks by several others, such as e.g. Finland and the Netherlands, who don’t wish to be hyper-inflated to the Wolfian version of prosperity.


The Dragon Speaks

Just prior to the QE announcement, Mario Draghi was interviewed by German newspaper “Die Zeit”. This interview was quite interesting and revealing. We learn for instance that Draghi’s inheritance was inflated into nothingness by Italy’s government in the 1970s, because a court instructed the guardian of his siblings to invest the money in “risk free” treasury bills – a fine example of expropriation by financial repression, i.e., precisely the policy Draghi himself now pursues:


Die Zeit: “Didn’t that inflation erode what your father left as inheritance?”

Mario Draghi: “What we inherited was not very large, but enough for his three children to study. The first time I returned to Italy in 1976 I found that the equivalent of a few hundred euros was all that remained of our inheritance. This was because the family court judge had instructed the guardian of my two younger siblings to invest the money in fixed-interest Treasury bills. And that made all the money disappear into thin air.

Die Zeit: “So you should actually understand why people in Germany are so afraid of inflation.”

Draghi: “That is precisely the point: in Germany, some people say of me – ah, that Italian, he is sure to fuel inflation in the German economy! And I explain to them that their experience of inflation dates back to the 1920s, while mine is far more recent. Those were difficult years.


What Draghi seemingly doesn’t realize is that inflation of the money supply can act on consumer prices with a very significant lag. It is true that consumer price inflation seems a very distant threat right now, but the more production is undermined by credit bubbles and the bigger the pile of money sitting in accounts becomes, the more likely it becomes that a tipping point will be reached and confidence in the currency evaporates. Then it will however be too late to do anything about it.

Draghi then insists that he is not engaged in financial repression. His policies sure are robbing savers, but that is supposedly “not the intention”:


Draghi: “Let me be clear: central bank policy is not about punishing German savers, and it is not about rewarding weak countries. The European Central Bank’s mandate is to achieve an inflation rate of just below 2% for the euro area as a whole. To fulfill that at this time, it must keep interest rates low and must work towards an expansionary monetary policy which accompanies growth. That’s the point, not punishment or rewards. But sometimes it is hard to explain this to everyone in Germany, including in discussions with some politicians…”

Die Zeit: “What are they saying to you?”

Draghi: “They say: in that way you are removing their incentive to push through reforms.”

Die Zeit: “And isn’t that true? Italy and France are two examples.”

Draghi: “Our job is not and cannot consist of taking on the reform tasks of individual governments – not least since we lack the democratic mandate to do so. Do you believe then that it would be better for German savers if we tried to raise interest rates?”


(emphasis added)

There can be no question that savers are in fact “punished” by these policies and incidentally, their declining incomes actually exert a negative influence on their demand, the very thing Draghi purportedly seeks to revive. As to the fact that loose monetary policy by the ECB removes the incentive for countries like France and Italy to pursue reform, who can doubt it? This is most definitely the case and it will make the next crisis situation all the worse.

Draghi then discusses the “deflation bogey” – never mind that there actually is no deflation in the euro area anyway. In a handful of countries, consumer prices as measured by their governments are declining ever so slightly, but compared to the devaluation of money that preceded this mild decline in prices, it is certainly nothing even worth mentioning.


HICPThe “terrible deflation danger” in the euro area as per the harmonized consumer price index – click to enlarge.


Draghi not surprisingly employs the same argumets that we keep hearing everywhere else, theories for which no proof exists, but which we are supposed to accept as inviolable and self-evident truths. In reality they are simply long refuted shibboleths of the Keynesian Cult with no visible connection to the real world.


Die Zeit: “Why do we need inflation anyway, even if it is very low?”

Draghi: “Yes, why? We’ve learnt this lesson from Japan. In Japan there wasn’t this 2% objective, and in the 1990s prices began to fall. The problem was not that prices were falling, but that people thought that they would never rise again, they would keep falling further and further. So they stopped buying things, because they thought they could get them even more cheaply at a later date. Production fell, so prices fell even further, and so the economy became slower and slower. We are not in that situation, yet.”

Die Zeit: “That’s what we call deflation.”

Draghi: “Yes, what I described is a negative deflationary spiral. The only thing that counters this is the credibility of our inflation objective — the attainment of which requires the continuation of our expansionary monetary policy.”

Die Zeit: “But you have already given us this expansionary monetary policy!”

Draghi: “Our expansionary monetary policy has already contributed to a turnaround in the growth of loans to firms. But that is not enough. […]”


(emphasis added)

The parallels to Japan worth mentioning are the following: first of all, just like Japan, we have experienced a deeply damaging credit bubble and asset price boom due to previous “expansionary monetary policy”. In other words, Draghi proposes to “fix” the problem by committing the same error again, only on a far grander scale. The other parallel are demographic trends, the graying of society. It should be obvious that for an aging society inflation is especially damaging, as retirees have to live on fixed incomes.

Draghi’s interpretation of what occurred in Japan is encapsulated in these sentences: “So they stopped buying things, because they thought they could get them even more cheaply at a later date. Production fell, so prices fell even further, and so the economy became slower and slower.”

People manifestly do not “stop buying things because prices are falling”. This is an utterly absurd contention. Have falling prices for computers and smart phones kept anyone from buying these items? How is it possible that these are booming growth industries, when the prices of their products are continually declining? Unless Draghi and others making such assertions don’t explain convincingly why this seemingly magical exception to their theory exists, they have no leg to stand on.

Will people stop eating when the price of food is expected to fall? Will they postpone life saving operations because they might cost less next year? Again, the idea that people will stop consuming if consumer prices trend down is neither theoretically nor empirically provable. In fact, it is complete hokum. That overall consumption in Japan has been declining may well have something to do with its demographic situation, but it certainly has nothing to do with the microscopic declines in prices that have occasionally occurred in some years (currently prices are rising at nearly 3% year-on-year in Japan, and consumption has nosedived at the same time – fancy that!).

The idea that prices will then fall even further because “production is declining” makes even less sense. Prices are falling when fewer goods are produced? On which planet? Not on this one, at least not ceteris paribus. If the supply of an item declines while the demand for it remains unchanged, its price will rise, not fall. It is almost as if Draghi has forgotten even the most simple economic concepts. Besides, what does Japan have to show for implementing QE several times, and its government spending money with both hands? Only one thing as far as we are concerned: the fundamental building blocks of a crisis so profound it could eventually take down the entire global economy.

Has Japan become poorer because its currency was strong and prices didn’t rise much? Of course not. What has made the Japanese relatively worse off compared to what could have been are precisely the policies advocated by people like Wolf and Draghi. To be fair, Draghi is not blind to the fact that major economic reform is required, but we will leave you with one more comment he made in the interview that is an even bigger head-scratcher than what has come before:


Die Zeit: So we now have credit with an interest rate close to zero. In addition to that, we now have the unbelievable blessing of falling oil prices that many countries are enjoying, which is not down to you though. Despite all this, the crisis countries are only making slow progress, if at all. Do you not sometimes have your own doubts as to whether your measures are truly working?

Draghi: You see, the falling oil prices are a good thing but to the extent that they have a negative impact on people’s inflation expectations not a good thing at all. The danger is that people may start believing that we will not go back to an inflation rate of 2% very soon, not even in five years and this by itself would have a recessionary effect. Shall I show you what the expectations’ curve for the inflation rate looks like? It is actually astonishing.


(emphasis added)

This is truly the pièce de résistance. Falling oil prices are of course an unalloyed blessing for the euro area, no ifs and buts about it. The euro area imports practically all its oil – i.e., it is purely on the consumption side of the oil trade. Contrary to the US, there is no shale oil industry that will see its junk debt go into default. For every consumer and producer in Europe, major cost savings on a largely non-discretionary expense have just been attained. This will lead to more spending on discretionary items, higher savings rates, bigger profit margins, and so forth.

How on earth can one even think this is bad? How can it possibly have a “recessionary effect”? Who cares about the nonsensical and completely arbitrary 2% inflation target? What’s so great about debasing money’s purchasing power at this rate anyway?

These may seem like rhetorical questions, but we can answer at least one of them: while there is nothing in economic theory that can possibly justify debasing money at an arbitrary percentage every year, such debasement is greatly favoring the current establishment, above all over-indebted governments. Their aim is to confiscate a part of their citizens’ savings through the back door via the “inflation tax” and inflate away the real value of their debt. This is designed to enable them to continue spending and growing the leviathan State. That is really all there is to it.

Incidentally, inflationary policy also redistributes wealth in such a way that the rich become richer and the poor become poorer (it should be obvious that the poorest strata of the population are suffering the most from the devaluation of money), a topic we have discussed extensively before and will no doubt have occasion to revisit again.



Given that already surging money supply growth rates in the euro area are now bound to increase at an even stronger rate, economic activity as measured by aggregate statistics is bound to pick up eventually. It is always important to keep in mind though that quantitatively measurable “activity” as such is not telling us anything about its quality. The boom prior to the 2008 crisis was also characterized by a measurable increase in “activity”, but as it turned out, most of it was merely a complete waste of scarce capital.

There is no reason to assume that this time will be different. These boom-bust sequences will continue until the economy is structurally undermined to such an extent that monetary intervention cannot even create the illusory prosperity of a capital-consuming boom anymore.

The bankers applauding Draghi’s actions today will come to rue them tomorrow.


draghi-bazooka-e1421936698559Bazooka man Draghi, taking aim at the euro.

Image author unknown


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