The question of the day is “Has Ambrose Evans-Pritchard Lost His Mind?” The reason I ask stems from his post on The Telegraph You are all wrong, printing money can halt Europe’s crisis
This will enrage many readers — especially the “Austrian” internet vigilantes — but I have to say it.
A near universal view has emerged that Europe’s crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain.
I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November.
Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.
This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.
This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it quite literally “solves” the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.
Yes, I know there are lots of central bankers who say or think monetary policy cannot achieve these miracles. They are wrong. Of course it can. A whole generation of policy-makers have been side-tracked into cul-de-sacs like (Bernanke) creditism, or German religious theories of “expansionary fiscal contractions”. (By the way, I learned in Ireland last week that the country’s 1980s experience used as the poster child for that credo is based on false data. It does not validate the theory at all).
They have forgotten some basic lessons of economic history. As the Bank of England’s Adam Posen put it, policy defeatism has taken over.
“Yesterday’s coordinated central bank intervention was like the captain of a transatlantic flight coming on the intercom to tell us that, while three of the four engines have failed, the remaining one might get us to our destination,” said Steen Jakobsen from Saxo Bank.
“The central banks are now the only source – or engine – of funding for banks. Yes, it means we now have even more guarantees of cheap money/liquidity in the system, but it’s still a scary, one-engine plane. The central bank liquidity is the one engine, while the private market that used to be the other three engines, has seized up and stop functioning.”
“French banks lost more than €120bn of funding in the short-term wholesale market from the US over the last month, and the duration of the funding fell from an average of 44-days to less than 5-days.”
Clearly a lot of investors think that Wednesday’s central bank drama is a sign that something big is starting, that authorities of Europe and the world “get it” at last.
Well, I’m sorry. The world gets it OK, but Germany does not, and nor does the ECB.
View from Steen Jakobsen
Pritchard cited at length some stats presented by Steen Jakobsen, chief economist at Saxo Bank. Let me cite a different quote by Steen, straight from the same article Are markets celebrating an engine failure?
The central bank liquidity is the one engine, while the private market that used to be the other three engines, has seized up and stop functioning. This is a negative ‘crowding out’ of private capital.
The market loves cheap liquidity and has reacted positively to yesterday’s coordinated move on USD swap lines, but this debt crisis is a problem of solvency – not one of liquidity/printing money, which makes the intervention a de facto exercise of extend-and-pretend, version 5.0.
To quote Pritchard “Quite“
Also note that Pritchard conveniently dropped the key sentence “This is a negative ‘crowding out’ of private capital.” from his quote.
Pritchard Wants to Save the Unsaveable
Pritchard clearly has it in for Germany. Why I do not know.
What’s disappointing about his article is that he predicted well in advance that the Euro experiment would end in failure. Rather than bask in the glory of being correct early and often, he has now lost his mind attempting to save the unsaveable.
If that’s not losing one’s mind, what is?
Monetary Printing Rebuttal
I could spend a lot of time writing a rebuttal to Pritchard’s monetary printing thesis, but I do not have to. Pater Tenebrarum wrote an excellent rebuttal on November 29.
Please consider Central Banks and Monetary Cranks
Monetary Cranks Unite!
Ambrose Evans-Pritchard is joining the ranks of the monetary cranks (and there are more then a few of those) sotto voce in a recent missive entitled “Should the Fed save Europe from disaster?“. After counting down the litany of things that are currently going wrong and could conceivably get worse, he launches into the following diatribe:
Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.
The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent. One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.
David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany’s fiscal Puritans of reducing Europe’s periphery to “indentured servants” and driving the whole region into depression with combined fiscal and monetary contraction.
“We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them,” he said.“
If adding to the money supply is truly beneficial, why not allow every citizen to set up his own money printing press? That would surely ‘increase spending’, and therefore should, following the logic of the likes of Bernanke and DeLong, lead to ‘economic growth’. If they disagree with this proposition, they must explain what difference it makes when the Fed (and the associated banking cartel) does it. As far as we can tell the main difference is in who gets to profit from the redistributive effects of money printing. Of course it could be argued that if everyone were free to print, there would be no way of controlling the amount that is created. In that case, how about crediting every citizen with a pro rata amount of the newly printed money? Why is it not done in this manner?
Evans-Pritchard seems to indicate here that one should prop up unsound debt by hook or by crook, if need be even against the wishes of those concerned. However, what can be expected to change if the debt is not propped up is in the main that the ownership of assets will be transferred from inept stewards of capital to decidedly more prudent ones. The assets concerned will not disappear.
So what good exactly is supposed to come of keeping the inept guys in charge at the expense of those who were prudent? We are eagerly awaiting an explanation.
Always Wrong to Bail Out Banks
Bear in mind that much of the austerity measures Pritchard rails against are designed to bail out the French and German banks.
It is always wrong to force tax hikes and other austerity measures on private citizens simply to bail out reckless bank behavior. Every Austrian economist in the world would agree with Pritchard on that point, something he fails to mention.
Pritchard Poses False Dichotomy
Pritchard poses a false dichotomy: print money or impose various austerity measures like hiking taxes to bail out banks. Why do either?
I wrote about this disgusting situation on Thursday in EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%
EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.
Three Key Provisions
- Taxpayers would be screwed for all losses up to 2013
- The year can be extended
- Writing down Derivatives is a last-resort
Since the market likes a free lunch at taxpayer expense it’s no wonder the debt markets rallied somewhat. However, to what extent the market will believe “no losses” and for how long remains to be seen.
Bailing Out Banks at Taxpayer Expense is 100% Wrong
Bailing out banks that take stupid risks is always wrong, in every situation. Taxpayers will suffer from higher inflation (notably in food and energy), wages will not rise, banks will pass out big bonuses once they are bailed out, and taxpayers will still be stuck with the debt.
That by the way is exactly what happened in the US and it is one of the reasons hiring is anemic and lending is weak.
In the US, but even more so in Europe, banks cannot lend because they are capital impaired. The solution is not austerity and higher taxes, but rather a writedown of that debt.
However, various structural reforms surely are needed, free-market reforms. France needs to stop protecting farms at the expense of the UK, Greece needs to get rid of its public union problems, Italy needs to shed a plethora of inane rules and regulations. I can go on and on about structural problems in the US, UK, EU, and every European country.
Printing money will not fix a single structural problem, all it will do is bail out the banks (yet again), leaving private citizens with debt they cannot pay back or inflation that punishes savers.
Yes, Ambrose Evans-Pritchard has indeed lost his mind because printing money will not solve a damn thing. It will only provide an illusion of temporary success, requiring still more printing when the stimulus dies.
Mike “Mish” Shedlock
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