Category Archives: ECB

CB announcements

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Just looks like the Fed lowered the rate on its swap lines to keep libor down, which had been moving up to its prior swap line rate.

No big deal, apart from the fact the Fed shouldn’t be allowed to lend on an unsecured basis like this without explicit approval of congress.

Lending unsecured on an unlimited basis has the potential to be highly inflationary.

With the currency a public monopoly, the price level is necessarily a function of prices paid at the point of govt spending and or collateral demanded when govt lends.

Allowing unlimited unsecured lending has the potential to vaporize the currency. And while in this case that kind of abuse isn’t likely, the potential is there.

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Why the IMF thing works for the euro

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As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.

Perhaps most important,
operationally,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.

To recap:

When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’

The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’

However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’

Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’

And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.

Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.

Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.

Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.

So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!

So now let’s see if it actually happens.

Merry Christmas!

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MMT to the ECB- you can’t inflate, even if you wanted to

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With the tools currently at their immediate disposal, including providing unlimited member bank liquidity,lowering the interbank rate, and buying euro national govt debt, the ECB has no chance of causing any monetary inflation, no matter how hard it might try. There just are no known channels, direct or indirect, in theory or practice, that connects those policies to the real economy. (Note that this is not to say that removing bank liquidity and national govt credit support wouldn’t be catastrophic. It’s a bit like engine oil. You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

Lower rates sure doesn’t do the trick. Just look to Japan for going on two decades, the US going on 3 years, and the ECB’s low rate policies of recent years. There’s not a hint of monetary inflation/excess aggregate demand or inflationary currency weakness from low rates. If anything, seems to me the depressing effect on savers indicates low rates from the CB might even, ironically, promote deflation through the interest income channels, as the non govt sector is necessarily a net receiver of interest income when the govt is a net payer. (See Bernanke, Reinhart, and Sacks 2004 Fed paper on the fiscal effect of changes in interest rates.)

And if what’s called quantitative easing was inflationary, Japan would be hyperinflating by now, with the US not far behind. Nor is there any sign that the ECB’s buying of euro govt bonds has resulted in any kind of monetary inflation, as nothing but deflationary pressures continue to mount in that ongoing debt implosion. The reason there is no inflation from the ECB bond buying is because all it does is shift investor holdings from national govt debt to ECB balances, which changes nothing in the real economy.

Nor does bank liquidity provision have anything to do with monetary inflation, currency depreciation, or bank lending. As all monetary insiders know, bank lending is never reserve constrained. Constraints on banking come from regulation, including capital requirements and lending standards, and, of course credit worthy entities looking to borrow. With the ECB providing unlimited liquidity for the last several years, wouldn’t you think if there was going to be some kind of monetary problem it would have happened by now?

So the grand irony of the day is, that while there’s nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national govt solvency risk but not halt the deflationary monetary forces currently in place.

So where does monetary inflation come from? Fiscal policy. The Weimar inflation was caused by deficit spending on the order of something like 50% of GDP to buy the foreign currencies demanded for war reparations. It was no surprise that selling that many German marks for foreign currencies in the market place drove the mark down as it did. In fact, when that policy finally ended, so did the inflation. And there was nothing the central bank could do with interest rates or buying and selling securities or anything else to stop the inflation caused by the massive deficit spending, just like today there is nothing the ECB can do to reverse the deflationary forces in place from the austerity measures.

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national govt solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

Post script:

The only way the ECB could inflate would be to buy dollars or other fx outright, which it doesn’t do even when it might want a weaker euro, as ideologically they want the euro to be the reserve currency, and not themselves build fx reserves that give the appearance of the euro being backed by fx.

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EU Proposes Intrusive Control of Euro Zone Budgets

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Another prelude to Germany supporting the ECB funding support that will end the solvency issue falling into place:

EU exec proposes intrusive control of euro zone budgets

By Luke Baker and Jan Strupczewski

November 23 (Reuters) — The Commission, the executive arm of the 27-member European Union, presented a draft regulation which would allow it to review draft budgets of euro zone countries by mid-October and ask for revisions if they were not in line with EU budget rules.

The budget drafts of euro zone countries would have to be based on independent forecasts.

The second regulation would create a legal basis for heavy surveillance of policies of a country either already getting emergency financial aid from the euro zone or facing serious financial instability.

“To return to growth, member states need to raise their game when it comes to implementing their commitments to structural reforms, as well as embrace deeper integration for the euro area,” Commission President Jose Manuel Barroso said.

“The goals driving this package — economic growth, financial stability, budgetary discipline — are linked to each other. We need all of them if we are to move beyond the current emergency towards a Europe in which solidarity is balanced by strengthened responsibility,” Barroso said.

Once the tighter oversight and control of euro zone national fiscal policy is in place, the 17 countries now sharing the euro could jointly borrow from the market through “stability bonds.”

The Commission outlined three main options for such joint debt issuance without making any recommendations on which might be best.

“The Commission makes clear that any move towards introducing stability bonds would only be feasible and desirable if there were a simultaneous strengthening of budgetary discipline,” it said in a statement.

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ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES

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Seems the logical consequence of hair cutting Greek debt and announcing it may happen to other member nations?

That said, would not surprise me to soon be hearing hints of something like:
‘ECB bond buying not necessarily inflationary if combined with austerity’ coming out of Germany,
triggering a massive ‘relief rally’ that will last until the reality of the austerity part sinks (syncs) in,
as the 10th plague infects the German bonds markets.

*ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES
*ECB’S STARK SAYS DEBT TOLERANCE IN EUROPE IS DECLINING
*ECB’S STARK SAYS INVESTORS ARE REASSESSING SOVEREIGN DEBT

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Germany takes the world down, take 3?

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Looks like for the third time in the last 100 years the world fiddles while Germany torches it?

Germany now stands pretty much alone in objecting to the ECB writing the check on the grounds that it’s inflationary, when it’s clearly not.

But, unfortunately, the rest of the world’s political and economic leadership doesn’t have what it takes to get through to them.

And the economic destruction this is causing far exceeds the destruction caused by all the shooting wars in history, as the death toll from the consequent global unrest mounts as well.

On Mon, Nov 21, 2011 at 7:05 AM, wrote:

Subject: BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE

(BBK = Germany’s Bundesbank)

BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE
BBK: RISING CONFLICT POTENTIAL WITH STABILITY-ORIENTED MON POL
BBK SEES GERMANY’S DEFICIT AROUND 1% OF GDP IN 2011, 2012
BBK: GERMANY’S GDP GROWTH TO SLOW TO 0.5-1.0% IN 2012
BBK: DEBT CRISIS IS JEOPARDIZING RECOVERY IN EUROPE
BBK: GERMANY’S INDUSTRY ADJUSTING FOR MILD DOWNTURN
BBK SEES GERMANY’S DEBT DOWN TO 81.1% OF GDP IN 2011

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