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How The Ecb’s Fig Leaf Has Completely Withered Away

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http://www.timesonline.co.uk/tol/comment/c...icle6597813.ece

Now that the global recession appears to have passed its low point, panicmongers in the media and financial markets are shifting their attention from deflation to inflation — and especially to the debasement of the dollar by the money-printing operations of the US Federal Reserve. Whether printing money necessarily always leads to inflation is a long-running theoretical debate which the economics profession shows no sign of resolving, there is a factual question related to this argument that is much more important and straightforward, yet completely misunderstood. Leaving aside the question of whether it is a good or a bad idea to print money, which of the world’s leading central banks is printing money faster: the Fed or the European Central Bank?

Last Wednesday, the European Central Bank injected €442 billion (£377 billion) of new cash into the euro money markets. This was the biggest long-term lending operation in the history of central banking and was equivalent to half the Fed’s entire monetary expansion in the past 18 months. Yet most people still believe that the Fed (along with the Bank of England) is engaged in a “reckless†experiment with inflationary quantitative easing (QE), while the ECB is steadfastly honouring the deflationist traditions of the Bundesbank’s “steady handâ€.

The ECB Council debated for months about QE, the modern equivalent of “printing moneyâ€, since it involves the central bank creating money out of thin air by signing computer-generated promissory notes and then distributing these around the commercial banking system by using them to buy up government bonds. In the end, the ECB decided to print only €80 billion to buy on private sector bank bonds, in contrast to the $1 trillion (£606 billion) of bond purchases undertaken by the Fed. And even this trifling monetary expansion was ferociously attacked by Angela Merkel for threatening Europe’s inflation outlook and jeopardising the credit of the ECB.

However, if we look at the facts, the transatlantic difference is less clear. In fact, the ECB is printing money even faster than the Fed is.

It is also supporting fiscal policy more explicitly through debt monetisation and taking much bigger risks with its credibility and solvency. The first point is illustrated in the chart. Since mid-2007, central banks have expanded their total liabilities (the broadest definition of what it means to print money in the modern world) by $1.2 trillion in the US and by $1.5 trilllion in euroland. Given that GDP is 12 per cent bigger in the US than in the eurozone, this means that the ECB’s printing presses have actually been running 50 per cent faster than the Fed’s. Someone should point this out to Mrs Merkel: since the ECB presses were presumably made in Germany, it would give her something else to boast about.

Meanwhile, we can move on to a second surprising comparison between the European and US central banks: their willingness to monetise government debts.

He's great isn't he? :lol:

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Having established that the scale of the money-printing operation has actually been bigger in Europe than in America, the next step is to compare the methods used by the Fed and the ECB to achieve these expansions. On this point, consensus opinion is even clearer: the ECB is almost universally seen as more “prudent†in the way it has expanded its balance sheet. The Fed has been buying government and agency bonds outright, thereby exposing itself to the risk of capital losses from rising interest rates, which in turn could potentially constrain its future monetary decisions. Even worse, the Fed’s willingness to buy Treasury bonds, at a time when the US Government’s deficits are exploding, means that it has taken the first step down the primrose path of debt monetisation that leads ultimately to Zimbabwe and Weimar. The ECB, by contrast, has not weakened its balance sheet with long-maturity bonds and dubious corporate assets and, most importantly, it has refused to buy government bonds or engage in debt monetisation.

This is the conventional wisdom, but again consider the facts. It is certainly true that the ECB has expanded its balance sheet almost entirely by lending money to the euro-area banks, while the Fed’s new lending has mostly been to the US Government and agencies. But does this really mean that the Fed has taken greater risks than the ECB or done more to facilitate profligate public borrowing? The answer to the question is a clear “noâ€. The ECB’s loans to eurozone banks at the latest count stood at $1.5 trillion — before accounting for last week’s €442 billion bonanza. Are these loans really as safe, or even safer, than the Fed’s $1.7 trillion of US Treasury and agency bonds? According to ECB apologists, its loans to the banks are completely safe because they are secured by collateral that can be sold if the borrowers default. But this reassuring claim disregards the massive reduction in the quality of collateral that the ECB has been accepting since the start of the credit crunch.

Unlike the Fed and the Bank of England, which only accept AAA public bonds as collateral for their lending operations, the ECB now lends against low-rated mortgage bonds, commercial loan books and other dubious assets that the markets would treat as “toxic†were it not for the ECB’s willingness to turn them into instant cash. The ECB has been praised for the boldness with which it has set aside the traditional rules of central banking in the crisis — and this is perfectly justifiable, but the ECB’s apologists cannot have it both ways. Those who praise the ECB for its “imaginative†response to the crisis must also acknowledge that it has accepted much greater credit risks than the Fed. Which brings us to the question of financing public debts.

The Fed has “monetised†roughly $1 trillion of US Government debt since 2007, if we combine its Treasury and agency bond buying. Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.

In effect, therefore, the ECB has been lending money by the shed-load to governments, with commercial banks acting merely as a fig leaf for what would otherwise be seen as a blatant monetisation of the most insolvent European countries’ public debt. In normal circumstances, this fig leaf might at least have theoretically protected the virginal purity of the ECB by interposing the commercial banks’ own balance sheets between the government borrowers and the ECB.

In normal circumstances, if the Greek Government defaulted, damaging the collateral deposited by Greek banks at the ECB, the losses would fall on the Greek banks, rather than the ECB, since commercial banks remain the beneficial owners of the collateral they deposit. But in today’s conditions, this Maginot Line between the credit problems of European governments and the ECB’s balance sheet is a joke, since the Greek, Irish and Spanish banks queuing up for ECB funding are near-insolvent and would certainly be insolvent were it not for the limitless supply of money they are getting, in exchange for dubious collateral, from the ECB itself. In short, the commercial bank intermediaries interposed between the ECB printing presses and European governments’ borrowings should not even be described as a fig leaf — more like the climactic G-string in the world’s most expensive strip show.

There all printing an no one cares at the minute.

They are all propping themselves up with quack economics.

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What Kaletsky failed to mention in these and all his other weekly columns, as well as in several appearances as an economics pundit on TV programmes including the BBC's Newsnight, is that since 1999 he has been chief economist of a financial services company called GaveKal.

The firm, whose name is an amalgam of Kaletsky's and French co-founder Charles Gave's names, was initially set up as a pure research operation but in 2006 moved into fund management.

GaveKal's first fund, based in Ireland, is called GaveKal Platform Company fund. It is a 'long only' fund, which means that it only holds stocks rather than betting against them by 'shorting' them.

Has been mentioned here before, but he has 'things' to pump

http://www.thefirstpost.co.uk/45602,featur...-richard-brooks

Rememebr, he was still a bull in July 2007, when the wheels were already coming off

http://business.timesonline.co.uk/tol/busi...icle2163758.ece

The US economy has passed its low point and while we do not expect it to return to trend growth of 3 per cent plus for another six months or so, all leading indicators suggest that a gradual acceleration is under way

But this need not be bearish for equity averages and could be very positive for high-quality companies and markets, which have been left behind by the fads for issuing junk bonds and repackaging low-quality assets.

And in June 2007, He just loved the US of A. In fact, the whole world was starting to see it his way :lol:

In the past few weeks, investors have finally woken up to the argument that this column has been presenting since this time last year: that the present US economic slowdown is not a prelude to recession and, therefore, that the Federal Reserve Board is very unlikely to slash short-term interest rates in the way that bond markets were expecting even a few weeks ago.

http://business.timesonline.co.uk/tol/busi...icle1945821.ece

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The Fed has “monetised†roughly $1 trillion of US Government debt since 2007, if we combine its Treasury and agency bond buying. Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.

Hidden QE and Bad Banks: the Eurozone "recipe" for this crisis :rolleyes:

Too bad the strong Euro is fukking it all up :lol:

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Have to say I rate this as one of his better efforts, and he probably has a good point about what the ECB is doing - seems to me to be a license for banks to buy up any old c**p and sell it on to the ECB for cash.

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Whether printing money necessarily always leads to inflation is a long-running theoretical debate which the economics profession shows no sign of resolving.

He has clearly spent a lot of time digesting theoretical debates :lol: ... to the extent that he still has no understanding what is the orthodox meaning of "inflation"...

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Whether printing money necessarily always leads to inflation is a long-running theoretical debate which the economics profession shows no sign of resolving

you increase the supply of something - its value reduces

despite trying to confuse people with fancy formulas

some economists get it

link

In one sense the question asked in the title of this lecture is purely rhetorical. I hope none of you has suspected me of doubting even for a moment that technically there is no problem in stopping inflation. If the monetary authorities really want to and are prepared to accept the consequences, they can always do so practically overnight. They fully control the base of the pyramid of credit, and a credible announcement that they will not increase the quantity of bank notes in circulation and bank deposits, and, if necessary, even decrease them, will do the trick. About this there is no doubt among economists. What I am concerned about is not the technical but the political possibilities. Here, indeed, we face a task so difficult that more and more people, including highly competent people, have resigned themselves to the inevitability of indefinitely continued inflation. I know in fact of no serious attempt to show how we can overcome these obstacles which lie not in the monetary but in the political field. And I cannot myself claim to have a patent medicine which I am sure is applicable and effective in the prevailing conditions. But I do not regard it as a task beyond the scope of human ingenuity once the urgency of the problem is generally understood. My main aim tonight is to bring out clearly why we must stop inflation if we are to preserve a viable society of free men. Once this urgent necessity is fully understood, I hope people will also gather the courage to grasp the hot irons which must be tackled if the political obstacles are to be removed and we are to have a chance of restoring a functioning market economy.

In the elementary textbook accounts, and probably also in the public mind generally, only one harmful effect of inflation is seriously considered, that on the relations between debtors and creditors. Of course, an unforeseen depreciation of the value of money harms creditors and benefits debtors. This is important but by no means the most important effect of inflation. And since it is the creditors who are harmed and the debtors who benefit, most people do not particularly mind, at least until they realize that in modern society the most important and numerous class of creditors are the wage and salary earners and the small savers, and the representative groups of debtors who profit in the first instance are the enterprises and credit institutions.

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Hidden QE and Bad Banks: the Eurozone "recipe" for this crisis :rolleyes:

Too bad the strong Euro is fukking it all up :lol:

Did you see Deutche's prediction on the Euro VWYF?

http://www.bloomberg.com/apps/news?pid=206...id=afH0UJDfj.GU

At the start of the year, after 2008 closed with the euro worth $1.3971, Deutsche Bank said it would weaken to $1.40 by June 30, just shy of where it was two trading days before the quarter’s end. Now the bank predicts a 17.1 percent gain to $1.20 per euro by year’s end, which would be the greenback’s best two-quarter performance against the euro or a basket of predecessor currencies since 1981.

$1.20 by year-end. Euro is f*cked.

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Have to say I rate this as one of his better efforts, and he probably has a good point about what the ECB is doing - seems to me to be a license for banks to buy up any old c**p and sell it on to the ECB for cash.

I read it differently. Arent the ECB loaning money and using the low quality assets as collateral? That money should be repaid at some point. I dont know how it is going to be repaid.

Does anyone know, what rates of interest does the ECB charge banks when it lends to them?

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Did you see Deutche's prediction on the Euro VWYF?

$1.20 by year-end. Euro is f*cked.

Well, I certainly believe it should be - however...

Forecasts for the currency are the most scattered in two years, with fourth-quarter predictions ranging from $1.16 to $1.55 per euro, Bloomberg data show. The median of 48 forecasts sees the year ending at $1.40, near the current level.

...

Market uncertainty is driving up foreign-exchange swings. Fluctuations in Group of Seven currencies have risen to more than double what they were in the year before the credit crunch started in mid-2007

You need a lot of patience in this market :huh:

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I read it differently. Arent the ECB loaning money and using the low quality assets as collateral? That money should be repaid at some point. I dont know how it is going to be repaid.

Does anyone know, what rates of interest does the ECB charge banks when it lends to them?

A few days ago they lent over Euro 400 bio @ 1% for a year

Edited by VoteWithYourFeet

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Well, I certainly believe it should be - however...

You need a lot of patience in this market :huh:

Yes, just shows you how much or little 'experts' know. Still, the downside appears to be around twice the upside as far as the range of outcomes in that article, which seems a reasonable punt.

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