A place incapable of supporting life as we know it – a
good description of where ECB monetary policy is leading us. Currency debasement is almost certainly
where we are headed because of Dr. Aghi’s assertion that the euro is irreversible,
not despite it. He bravely assumes that in making such a statement he is
creating an aura of consensus and strength. In its
current form the euro is a busted flush and is being held
together solely by political intransigence and ECB connivance. From the very
beginning the rules of engagement were ignored because without political and
fiscal centralisation they weren’t going to work anyway.
But did this stop most of the eurozone countries – and the Southern “Methadone” Zone in
particular – from getting on
board the gravy train and
going on one hell of a trip courtesy of German style interest rates. It would have been rude not to! And no worries about the lack of a
long term structure to keep this thing on the rails; we can deal with that
later. Well later is now and guess what? They all want
to stay on the train but can no longer afford the fare;
ignoring the fact that they never could in the first place.
One of the many problems the eurozone faces, along
with the US, UK, Japan et al, is how to service their massive debt burden. They can’t, but insist on reapplying the
band aid to create the illusion of progress. As Einstein put it, “insanity is
doing the same thing over and over again and expecting different results.” We
now have OMT to ponder upon – Outright Monetary Transactions. My reaction thus
far has been “OMG!” Typical of an ill conceived contrivance, the press release
on the “technical” features of OMT comprises 17 short sentences; one of which
says, “the liquidity created through Outright Monetary Transactions will be
fully sterilised,” but doesn’t say how – that would just be too technical!
Money “printing” involves a central bank buying
“assets”, usually sovereign debt, and crediting the seller with money that it
has created electronically. The theory being that this
money is used to encourage spending by way of loans to consumers and
corporates, but which has the potential outcome of higher inflation. It should
also drive short term rates down if, like with the OMT operation, the ECB is
buying at the short end of the curve – the complete reverse of the Fed’s
Operation Twist by the way. The
announcement of OMT has had the desired effect on rates,
especially Spanish and Italian, where the cost of new issuance was creating the
debt servicing issue mentioned earlier. However with
more than a nod to the Bundesbank, the ECB has declared that it will sterilise
the purchases so that there will be no inflationary effect.
They can do this either by selling other assets, for example long dated issues
or attract deposits at the ECB both of which remove the newly created money
from circulation. The first option is unlikely as they really don’t want to
drive longer term rates upwards, so they are left with the second or they could instead sell some of their gold reserves, but that
would be akin to selling the family “silver”. They wouldn’t do
that would they? Well they might! Thinking that politicians and central bankers
would be so crass is another example of one of life’s “heroic” assumptions. The
Chinese would have it off them in a trice and how would that help the cause?
Currently,
such is the lack of trust in the interbank market that attracting money into
ECB deposits is not a short term problem, but by such sterilisation the benefit
of loan growth on spending is lost. So this is just another short term breathing space to allow the PIIGS to refinance
their maturing debt at less penal rates, but does absolutely
nothing to solve the longer term problems of creating growth in economies
stifled by ECB “conditionality”; a very sterile landscape indeed. But cheer up!
QE3 will be along any day now to help the banks remain solvent for a while
longer. Can exits stage right after another good kicking…
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