In spite of the facts …
- That QE causes economic distortions that benefit the already wealthy at the expense of everyone else
- That QE tends to create asset bubbles that eventually bust
- That printing has never in history permanently solved anything …
monetarist fools clamor for more of it.
ECB Really Must Act
Reuters writer Hugo Dixon says ECB Really Must Act on Deflation
In September, inflation was above 2 percent in only two of the euro zone’s 17 countries, the Netherlands and Estonia. It was negative in Greece, and in Latvia, which is to join the single currency in 2014.
A looser monetary policy might push inflation in other countries, such as Germany, above 2 percent. But this would be a good thing.
What then are the best tools for the ECB to use? Shaving another quarter of a percentage point off its main interest rate, to bring it down to 0.25 percent, is the obvious first step. But it won’t achieve much and, after that, the ECB will have exhausted its conventional arsenal.
Fortunately, the central bank has unconventional tools too. In Draghi’s words, “we have a vast array of instruments”. Two, in particular, come to mind.
The first is the so-called long-term refinancing operation. This involves lending cheap long-term money to banks. The ECB lent 1 trillion euros two years ago in this way, to keep the banks afloat. Much has been repaid. But given that the rest is due to be repaid in just over a year, it would make sense to launch a new operation to ensure banks don’t run out of cash.
A more dramatic instrument would be to initiate a programme of quantitative easing (QE). This would involve the ECB going into the market and buying up large quantities of government bonds, in the same way that the U.S. Federal Reserve and the Bank of England do.
Last year, the ECB promised to buy unlimited quantities of peripheral governments’ bonds in order to preserve the euro. But QE would be different. It would involve buying bonds issued by all governments, including Germany’s, and its aim would be to push euro-wide inflation up to its target.
There would be two other beneficial consequences: the euro would fall, boosting the zone’s competitiveness; and the anemic growth rate would pick up. QE would be a departure for the ECB. But now’s the time to embrace it.
“Ensure Banks Don’t Run Out Of Cash”
Dixon wants to ensure banks don’t run out of cash.
Let me remind Dixon that banks aren’t lending due to lack of demand, the pool of willing borrowers primarily consists of poor credit risks, and finally, banks are capital impaired.
Thus, any suggestion that banks need more cash to lend is ridiculous.
That said, banks could need more cash if there is a run on the banks. And in that regard, the only surprising thing is there hasn’t been such a run, especially in Spain.
As for pushing euro-wide inflation up to its target, why does anyone think 2% is a magic target? Because central banks say so?
Dixon fails to consider the flaws in the Euro itself. The aggregate inflation rate of 2% led to housing bubbles in Ireland and Spain, and inane economic policy in Greece and Portugal.
One size does not fit all. And we have seen the resultant bubbles time and time again, with disastrous consequences each time. Only economic illiterates demand more of the same.
Unfortunately, it’s far too easy to find economic illiteracy. Next up …
ECB’s Easing Dilemma
Izabella Kaminska on Financial Times Alphaville speaks of the ECB’s Easing Dilemma.
The text suggests the dilemma is which tool to use, putting her squarely in a camp with Dixon.
Another Swan Dive Into Cesspool of Economic Silliness
Telegraph writer Ambrose Evans-Pritchard took another swan dive into the cesspool of economic silliness, singing the praises of France’s industry minister, Arnaud Montebourg.
Please consider Pritchard’s article Southern Europe is on a precipice.
EMU-wide inflation fell to 0.7 per cent in October. Yet this is only half the story. Once austerity taxes are stripped out, prices have been falling in 10 of Euroland’s 17 states over the past four months, including Italy and France. They are one shock away from outright deflation.
The euro exchange rate is far too high for two-thirds of the euro states, a key reason why unemployment hit an all-time peak of 12.2 per cent in September. It is pushing Europe’s crisis states into Thirties-style deflation, making it almost impossible for Italy, Spain and Portugal to dig their way out of debt.
France’s industry minister, Arnaud Montebourg, asks why Europe is letting the euro stay so high, alone in refusing to protect its societies while others steal a march. The US Federal Reserve and the Bank of England have nudged down their currencies by printing money. The Bank of Japan has carried out a devaluation putsch. The Swiss have trumped them all, printing à outrance to cap the franc. “Every 10 per cent rise in the euro costs France 15,000 jobs. Britain, the US, Japan, all have a strategy of monetary stimulus, but in the EU we have nothing but hard money. The currency doesn’t belong to bankers, and it doesn’t belong to Germany, it belongs to all members of the eurozone,” Mr Montebourg said.
The north-south split has many causes. Germany sells machines and prestige cars with a fat profit margin. “Club Med” (the south) competes lower down, against China. Yet it is also because Germany screwed down wages in the early years of EMU, gaining 25 per cent in competitiveness against its peers. How this happened is an old story. But the consequences are toxic, so toxic that François Heisbourg, French head of the International Institute for Strategic Studies, is calling for the euro to be “put to sleep” in order to save the European project. “We must face the reality that the EU itself is now threatened by the euro,” he said.
Mr Heisbourg is pro-Europe. His point is that conflicting narratives of the crisis are emerging, pitting creditor and deficit states against each other. He compares them to the black legends after the First World War, when twisted views fed an ideological backlash, and fears that it will end in “a nervous breakdown and an uncontrolled disintegration of the euro”.
This year’s euro surge has brought that closer. The European Central Bank can force it to back down any time by ending its contraction policies, and switching to reflation. The ECB’s Club Med governors act like rabbits in headlights, frozen as the juggernaut hurtles over them, unwilling to say “boo” to the German Bundesbank.
We will find out this week if they are at last willing to take charge of monetary policy and avert disaster. If they recoil, the euro will push back up again and they may as well sign a deflationary death sentence for southern Europe.
The Euro Is Doomed
The euro is fatally flawed. Pritchard knows as much. He was one of the original eurosceptics.
Yet time and time again, he espouses economic insanity in an attempt to save what cannot be saved.
Those looking for a “hard currency” should consider gold or silver.
Montebourg call the euro a “hard currency”. If that’s not the sign of a severely twisted mind, what is?
Following Lemmings Over The Cliff
The US, Japan, England, and Switzerland all engage in printing or other currency manipulation schemes.
Like lemmings over a cliff, Montebourg wants to follow. And Pritchard wants to follow Montebourg.
I have asked Pritchard this question before, on numerous occasions, and never received an answer. Here it is again: How can any country gain advantage if they all engage in competitive debasement?
Mathematically, there cannot possibly be any benefit (but there can be severe economic distortions), which is of course why Pritchard ignores my question.
All competitive currency devaluations can possibly do is create asset bubbles and other economic distortions. Unfortunately, such bubbles can be found everywhere you look: in US stocks, corporate bonds, global equities, Japanese government bonds, etc.
When those bubbles burst, we will likely see asset price deflation in spades, with severe economic consequences.
Full speed ahead anyway suggests Pritchard, purportedly to save something Pritchard knows full well cannot be saved.
It’s madness! For still more madness, please see Abe Calls for Wage-Price Spiral to Create “Virtuous Circle”; Shame Shame
Mike “Mish” Shedlock