There was one central bank that did the opposite of what financial markets expected it to do, and it stirred up a mushroom cloud of anger: the Swiss National Bank removed the cap on the Swiss franc without warning. The franc soared, and the popular trade at the time – shorting the franc – blew up spectacularly. It ripped into leveraged FX trading accounts and FX brokers. And Swiss stocks dove.
But the ECB is not so inclined. It’s in a symbiotic and interdependent relationship with the financial markets. And so it gives them the goodies of their wildest dreams: QE and the new math of negative yields.
Negative yields have been spreading around Europe as the ECB has been hinting at a big bout of QE for two years. Hints have turned into a promise. But negative yields haven’t done anything for the economy. Instead, the ECB has instigated a currency war, where smaller non-euro countries around the Eurozone, on which they depend for trade, are desperately struggling to not get blown away by the swooning euro.
Negative yields are creeping into longer maturities of government debt in a number of Eurozone countries. Savers are increasingly getting hit with negative deposit rates. Negative yields have even started to crop up in European corporate bonds. And mortgages with negative interest rates have bubbled up in Denmark.
It’s all an experiment. The folks at the ECB have no clue how it will turn out. No one has ever done this before on this scale without end in sight, the absurd new math of paying someone – a government, a corporation, a homeowner – to take your money.
If these countries were stuck for the next many years in deflation of, say, 5% per year, it would make sense. But they’re not. For the Eurozone as a whole, there has been a slight dip into deflation caused by plunging energy prices – a good thing in countries that don’t produce energy. It lowers the cost of energy imports, cuts input costs for companies, and frees up money consumers can spend on other things. For countries that import their oil, falling oil prices are a godsend.
At what point are people going to stash crisp €500-notes – if they can still get them – under the mattress or in their walk-in closet, rather than paying a bank to hang on to their money, hoping that the bank won’t topple and take that moolah Cyprus-like with it?
What other distortions are caused when creditors are paying governments, corporations, and people to borrow money? What does it do to the creditors when a supposedly income-producing asset with some risk is churning out expenses instead? What damage will it do to the foundation of the economy?
The ECB doesn’t give a hoot about these issues. It has a different mission. And now we know from French investment bank Natixis, a subsidiary of Groupe BPCE, France’s second largest megabank, what that mission is.
The report agrees with most folks, if not nearly all folks, that the ECB’s QE will do “very little” for economic growth of the Eurozone.
The Eurozone had a record trade surplus with the rest of the world in 2014, and there is no trade imbalance to fix. The “wealth effect” has failed miserably in the US in cranking up the real economy; and it’s considered even weaker in the Eurozone. More liquidity for Eurozone banks? They’re already awash in it. Falling rates won’t boost lending. Rates have been falling for a long time, but there is not enough demand for loans. And triggering inflation? QE hands free money to well-connected speculators to drive up asset prices. But it’s unlikely to drive up consumer prices because consumers who could actually spend the money are not getting their hands on it.
But QE will have “significant effects on financial markets,” Natixis says. As that scenario plays out, with QE failing to produce economic growth, a new series of events will unfold. According to Natixis:
1. The ECB leaks the idea that it is considering further actions, in order to more effectively boost inflation and expected inflation. This is in fact already the case (as suggested recently by ECB Executive Board member Peter Praet).
2. Financial markets try to imagine what these further actions could be: an increase in the size of the quantitative easing program, ECB purchases of corporate bonds, bank loans, etc.
3. Having imagined them, financial markets factor in these further actions, leading to a tightening of credit spreads and a rise in share prices, especially for financial stocks.
4. Once these further ECB actions have been anticipated and priced in by financial markets, the ECB is forced to introduce them so as not to “disappoint” the financial markets, to prevent a market meltdown.
So Natixis tells investors that they should be thinking about the “after” – what “the next monetary stage” will be after the QE program kicks off in March and fails to produce results in the real economy. Just by thinking about it, and by beginning to expect this “next monetary stage,” investors will trigger it. These expectations are “self-fulfilling”:
If investors expect an action by the ECB, and financial markets accordingly factor in this action, then the ECB is practically forced to carry it out. There should therefore be serious thinking about the potential for even greater monetary expansion in the Eurozone.
The irony is that Natixis, one of the big beneficiaries of the ECB’s QE, is already getting the self-fulfilling prophecy rolling. It would be hilarious if it weren’t so serious how this works, how central banks are enslaved to the wishes of speculators and banks, and how any thought of acting independently from these wishes à la SNB is instantly stymied by the threat of a “market meltdown,” as Natixis put it – a situation that the little SNB had the guts to face, but that the big 800-pound ECB-gorilla can’t even imagine.
In the Fed’s America, leverage has taken on a new dimension. But what if it comes unglued? Read… Reckless Stock-Market Leverage Intoxicates Politicians
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As the ECB knows the Euro is threatened, a QE program for the sole purpose of buying its own bonds would seem to be a smart decision. This would decouple the Euro from speculative risk.( as in they don’t have to worry about having to increase interest rates to get third parties to buy their Euro denominated bonds. Who wants to hold bonds denominated in a currency that may vanish?).
It seems to be an admission of Eurozone weakness.
If the Eurozone should break up, then how would owners of Euros or Euro bonds convert them back to their native currencies? How many German marks are in one Euro? Anyone care to take a stab at to how this would work.
I assume the US dollar would soar.
ECB needs an issue for people to whine about lol. All part of delaying the inevitable!
Very well stated Wolf. What’s the point of depositing cash in a bank if there’s no return to the upside, let alone financial punishment?
I would argue, and many others with more knowledge of the situation agree, that the Fed and the ECB are simply transferring wealth to the Uber-elite by their ‘QE’ programs.
Readers may want to look at ZeroHedge’s ‘”Too Big to Fails” Have Stopped Being Banks’ by George Washington for an explanation of why Wall Street’s big banks don’t care about small folks parking money with them.
As galling as it can be, this pretend and extend will probably go on for a very long time. Greece could change that but I don’t sense yet that they’re willing to leave the Euro. And of course the EU doesn’t want Greece to leave.
So I expect more of the same back and forth for many months; a sort of wearing down on both sides.
It won’t change until things get so bad that the people literally revolt (blood in the streets); then the proposition of going back to a national currency might not seem so bad.
As far as EU QE, it’s just more of extend/pretend. It does help clean up balance sheets and ultimately could lead to inflation; but for now, it’s mostly about doing something versus nothing….to allow the Central Banks to appear as though they are in control.
In the US,
I think it is extremely important to get into the head of Schauble and understand the disgust he feels for Varoufakis. We can all see the almost visceral disgust in the pictures of these two as their endless meetings have been recorded by the photographers’ lens.
Our common impression is so overwhelming and so obvious, that because we are so impressed visually with the photographic images, each that say the same thing to us, we all have every chance to miss what is really going on in Schauble’s head.
There is a very real reason for the way Schauble looks, when he looks at Varoufakis.
Make no mistake about it, Greece, like Spain, Portugal and Italy, has spent itself into a universe of endless hurt and debt-slavery. Schauble knows this. Varoufakis knows this. The anecdotal can has been kicked down the road so many times, the sheer negligence of this repeated can-kicking is now hovering over these meetings like an unimaginably dark cloud.
This dark cloud is not the reason for the expression on Schauble’s face however.
Schauble looks the way he looks because Varoufakis is flexing political might, regardless that it threatens 600 million Europeans with economic calamity. And Schauble looks at Varoufakis that way because, Schauble recognizes the political animal with which he is entangled in this pointless universal farce.
Schauble knows, there is no way for Greece to vote itself out of the financial trouble it has brought upon itself. And now Varoufakis knows it too.
So, what Varoufakis is doing, is strengthening is own hand, his personal position, and the personal positions of his associates who share the day-to-day insider knowledge concerning what will become tomorrow’s next Tsipras move taken wholly at the expense of Greece and the whole European Union, if not the whole world.
The deceit is the only option Varoufakis has, to continue to make things worse for everyone all the way around the table at which he is set, while continuing to affect world markets, day in and day out for the benefit of a few Tsipras insiders.
From the standpoint of the Tsipras government insiders who have advance knowledge of the next reneging move planned, these people surely place market bets that will increase their personal wealth, and the personal wealth of their financial backers.
The gains are peanuts compared to what is really at stake however.
But the crooked game is no different from that being played by every U.S. banker who gets insider knowledge concerning what the Fed is going to do next. Anyone who doesn’t recognize this, doesn’t really understand the extent to which the markets are rigged. The markets are rigged for the benefit of those who can rig them, and by anyone who can rig them, including CEOs, politicians and central bankers.
And that happens all the time too. For in reality, all these financial people are political animals, maneuvering that which they can maneuver, while taking and making their own personal gains, wherever and whenever they can as things progress toward the ever-worse of our present progressive reality.
Greece? There is no deal, because there is no deal possible on political terms. And the fanatical financial terms just represent more collective debt suicide.
People in Greece are dying every day right now. The wound is raw. The Greek people are being slowly bled to death. They are killing each other for something to eat, and for what little gain that can be realized by their murderous instincts that are increasingly coming to the fore.
Greece and the Tsipras government are at the point where there is nothing left to do, but renege and renege again and again, and play the market with each move, until Schauble and the EU completely tire of it, and walk away from the table refusing to listen to it any more of it, or to provide the platform that allows the endless rigging of the markets that Varoufakis and his gang are capable of, and accomplishing, if it is all they are capable of accomplishing.
At which point, when the show is over, the final option for Greece of course will be war and terrorism directed against the EU.
Because in the end, the individuals that make Greece are completely fed up with being the pawns of all these lying politicians who are after all, really only pretending to have the better interests of the world’s economy in mind.
That’s the big lie.
Not one of these politicians or central bankers gives one hoot about the people who are suffering and dying all the way around the whole world due to this ongoing economic debt madness. No less than in Greece, the smell of death is everywhere in the air.
Everyone is really only doing what comes naturally. They are looking out for their own individual interests. The global village has again become the global jungle.
And to all those who believe this is progress? Yeah, sure it is, in a social Darwinian sense. The naive, innocent, ignorant and the dupes are the first to succumb in times like these. They are typically bludgeoned to death like baby seals in pools of blood red on the white arctic snow.
It’s all so very interesting, it kinda makes you feel like, if you looked into the mirror, you’d have an expression on your face just like Schauble.
Ignoring the folly of price indexes for a moment, I think it is correct that the ECB will have to surprise investors with the amount of stimulus (in the positive direction) if they want to realize their price inflation numbers, since price inflation/deflation is dependent in large part on individual anticipations of the future supply of the currency.
I think financial markets across the world are achieving their price inflation numbers and then some, but only in the assets of the sociopolitical elite, the central banker’s intended (stated overtly) goal all along. Perhaps I am giving these clowns too much credit, but it would be quite a coincidence that the pandemic economic policy on Earth (inflation) seems to benefit the banks and the large shareholders…and of course those institutions of violence we call governments in every case, at least in the short run.
Great article Wolf. Thank God for people like you.