The interventions of the past 4-5 years are really incomparable with anything in the past 70-80 years and the era of modern, fiat based, Central Banking. These
John Laws of modern time have had no result to show for their massive amounts of printing except for enormous debt loads on the sovereign balance sheet of their countries.
Yet, it seems that money printing is the cure for many seemingly totally unrelated issues. Indeed, printing money:
- Creates jobs
- Creates economic growth
- Saves currencies
- Saves political unions
- Improves exports
- Put here whatever you like, money printing will do it for you.
To be honest, one must really have a critical mind to be able to see through most of these urban legends perpetrated by mainstream media and parrot journalists for decades. The still, one of these stands out as the most inept statement ever; yet people seem to believe in it, it's the one about printing an unlimited amount of Euros to save the Euro. The fact that the whole world is still buying into the ever increasing amount of lies and non-sense coming out of the mouth of lunatic central bankers is very telling about the overall sentiment of the market.
Moreover, the amount of intervention done in the past few months alone is so gigantic and its scale so much beyond imagination that it is completely unsustainable going forward, even for a short period of time. Yet, in spite of all this, "inflation", defined as the growth of overall money and credit, is not happening in those economies (namely, in the UK, the EU, the US and Japan).
We have reached what I would like to call
the peak confidence in, and peak interventionism by, Central Banks from where there's only one way ahead: disappointment and reduction of interventions:
- Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
- Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
- Draghi Lured by Fractious EU Leaders to Build Euro 2.0
- Draghi Says Officials Agree on ECB Unlimited Bond-Buying
- Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
- Mario Draghi’s Big Moment, Continued - ECB to "do whatever it takes"
- SNB’s Franc Defense Swells Reserves to 71% of GDP
- SNB’s $380 Billion Pile Makes Jordan Wonder
All these plans will come crashing down to the earth, and most of those expecting the Fed doing QE and the ECB buying bonds will be sourly disappointed. I have already been through the reasons before; and the fact that the Central Bankers are talking the markets up without intervening will end up badly for those who believed the lies.
In addition to my previous posts here are quotes from Graham Summers who writes a great newsletter at GainsPainsCapital.com:
Super Mario's Big Bluff
The financial world has entered a new state of mania with the announcement by the ECB that it will engage in "unlimited" bond buying to maintain lower interest rates for trouble EU sovereigns.
As you no doubt know, our firm's forecast was that the ECB would not engage in any large-scale bond purchasing programs.
We maintain this view today regardless of the ECB's announcement.
The reason?
The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:
- Applying for a bailout from the EFSF
- Meeting fiscal budget requirements
- Implementing major spending cuts and various other austerity measures
-
[...] Let's cut through the BS here. The use of the word "conditions" completely negates the word "unlimited." Saying that you'll buying "unlimited" bonds as long as EU sovereigns meet certain "conditions" actually means nothing.
[...] The ECB says it will buy EU sovereign bonds if EU
nations apply for bailouts from the EFSF. Spain and Italy (the very countries
that need bailouts) are meant to supply 30% of the EFSF's
funding.
So this new program involves Spain and Italy
bailing themselves out, while simultaneously implementing austerity
measures so the ECB will buy their sovereign bonds?!?!
Oh, and by the way, the EFSF only has €65
billion in funding left. That will definitely be enough to bailout Spain and
Italy, seeing as Greece has received over €200 billion in bailouts is
still imploding.
What's the Fed Going to Do?
Today we turn our attention to the US's Federal
Reserve where the whole world expects the Fed to announce QE 3 at its FOMC
meeting this Wednesday and Thursday.
There is a small problem of math with this. The
Fed currently owns all but just $650 billion of the outstanding 10-30
year Treasuries. At this point, even a $200-300 billion QE program would create
serious liquidity problems for the financial system. So scratch that idea off
the list.
Of course, the Fed could potentially implement
another agency/MBS QE program. But that would be a very political move
with the Presidential election so close. This, combined with current food and
energy prices, makes it unlikely the Fed would want to do this: too many
consequences with too little to gain (stocks are at four year highs).
Indeed, if anything, the Fed is likely to pull a
"ECB" move, namely promising something vague that it actually cannot
deliver on. Why would the Fed do this? Because, like the ECB, the Fed is
running out of bullets. Indeed, St Louis Fed President James Bullard all
but admitted this to the Financial Times:
"I am a little - maybe more than a
little bit - worried about the future of central banking," said
James Bullard, president of the Federal Reserve Bank of St Louis, in a
Financial Times interview at Jackson Hole. "We've constantly felt that
there would be light at the end of the tunnel and there'd be an opportunity to
normalise but it's not really happening so far."
The biggest worry on display at Jackson Hole was
whether these bureaucrats, sitting at the heart of every mature economy, still
have the power to influence demand now that interest rates cannot fall much
further. Lurking behind many debates was this question: if central bank
policies are so effective, why is the global economy not growing
faster?
Here's a Fed official, not only openly admitting
that Fed policies aren't working, but even calling the future of Central
Banking into question. Take note: underlying realities are beginning to be
asserted by officials at Central Banks around the globe. They're running out of
bullets.
So where does this leave us? Well, it's highly
unlikely the Fed will actually implement anything major this week.
What we could see is a large, but hollow promise for action, much like
the ECB's promise of "unlimited" bond purchases based on certain
"conditions" being met (an empty promise if ever there was
one).
Finally, see for yourself some quotes from various reports listed above which I have collected over past few weeks.
Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
Federal
Reserve Chairman Ben S. Bernanke, who last month defended his
unorthodox monetary policies, has a new tool at hand should he seek one
to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week
will announce monthly purchases of $50 billion to cut the jobless rate
while holding inflation at 2 percent. Economists at Goldman Sachs Group
Inc. (GS) and BNP Paribas, responding to last week’s report of slowing
job growth, also say they expect an announcement of an open-ended plan
on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for
purchases has resulted in abrupt withdrawals of stimulus that later was
renewed after the central bank failed to reach its goals. By contrast,
an open-ended program would tie purchases to a sustained improvement in
the economy, said Michael Gapen, senior U.S. economist at Barclays and a
former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8
percent unemployment isn’t doing it for you -- they need a faster
acceleration,” said Gapen, who is based in New York. “So, the decision
is, ‘OK, let’s hit the pedal.”
Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
Just
six months ago, money market traders expected the Federal Reserve to
raise interest rates by the end of 2013. Now, they see borrowing costs
staying at record lows for about three more years as the economic
outlook worsens.
Bond market measures from overnight index swaps, which indicate no
rise in the federal funds rate until mid-2015, to a 62 percent decline
in a measure of volatility in government bonds signal that rates will
stay near zero for longer. The gap between two- and five-year Treasury
yields, which decreases when traders expect benchmark rates to remain
subdued, is more than 50 percent narrower than its average since 2008.
Investor expectations for sluggish growth and low inflation remain
intact even though the collapse of Lehman Brothers Holdings Inc., which
triggered the worst financial crisis since the Great Depression,
happened four years ago. While the economy expanded in the second
quarter, the unemployment rate remained above 8 percent for the
43rd-straight month in August.
“The problems have been bigger than anticipated and it will take a
while to work our way through these issues,” Larry Dyer, a U.S.
interest-rate strategist in New York with HSBC Holdings Plc’s securities
unit, said in an interview on Sept. 6. “The bond market is pricing in
pretty close to a very prolonged period of low growth,” said Dyer, whose
firm is one of the 21 primary dealers that trade with the central bank.
Draghi Lured by Fractious EU Leaders to Build Euro 2.0
The
European Union’s 19th crisis summit was winding down when European
Central Bank President Mario Draghi made an unusual request. He wanted
some alone time with EU President Herman Van Rompuy to thank him for
charting the path toward a shock-proof euro zone.
Only later did the significance of the blueprint sketched out at the
June summit in Brussels emerge. The commitment to tighter bank
supervision, budget coordination and a nebulous “political union” was
instrumental in persuading Draghi that governments are putting the
currency on a sounder footing, leading to yesterday’s ECB decision to
buy bonds to help them get there.
Draghi Says Officials Agree on ECB Unlimited Bond-Buying
European
Central Bank President Mario Draghi said policy makers agreed to an
unlimited bond- purchase program as they try to regain control of
interest rates in the euro area.
The ECB needs to be in a position to ensure the transmission of its
rates in all euro-area countries, Draghi said after the ECB held its
benchmark rate at a record low of 0.75 percent.
“We will have a
fully effective backstop to avoid destructive scenarios with potentially
severe challenges for price stability,” Draghi said at a press
conference in Frankfurt today.
Draghi has staked his credibility on the bond plan, telling
lawmakers in Brussels this week that the ECB needs to intervene to wrest
back control of rates in a fragmented euro-area economy and save the
single currency. Now it’s up to governments such as Spain and Italy to
trigger ECB bond purchases by requesting aid from Europe’s rescue fund
and signing up to conditions.
“Governments must stand ready to activate” the rescue fund in bond
markets when needed “with strict and effective conditionality,” Draghi
said.
The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, Draghi said.
Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.
Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
European
Central Bank President Mario Draghi said the bank’s primary mandate
compels it to intervene in bond markets to wrest back control of
interest rates and ensure the euro’s survival.
Mounting his strongest case yet for ECB bond purchases, Draghi told
lawmakers in a closed-door session at the European Parliament in
Brussels yesterday that the bank has lost control of borrowing costs in
the 17-nation monetary union. Bloomberg News obtained a recording of his
comments, some of which were published by Italian news agency AGI
yesterday.
“We cannot pursue price stability now with a fragmented euro area
because changes in interest rates affect only one country, or two
countries at most,” Draghi said. “They have no importance whatsoever in
the rest of the euro area.” ECB bond purchases are therefore “a way to
comply with our primary mandate,” he said, adding: “Frankly, all this
also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the
hearing and did not provide any further comment. Draghi’s comments come
two days before the ECB’s Governing Council is due to decide on his
bond-buying proposal, expectations for which have already driven down
yields in Italy and Spain. In the testimony, Draghi rebuts arguments
that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”
Mario Draghi’s Big Moment, Continued
Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the
European Central Bank, and the plans, if any, he will announce to help
manage the European Union’s financial crisis. Next, on Sept. 12,
Germany’s constitutional court will rule on the legality of the European
Stability Mechanism, the euro area’s new permanent bailout fund, and
the fiscal pact that curbs government deficits. If either event goes
badly, watch out.
In July, Draghi aroused expectations that he has so far been unable
to meet when he promised the ECB would do “whatever it takes” to defend
the euro system. This was seen as a pledge of unlimited bond buying
aimed at lowering the long-term interest rates that Spain, Italy and
other distressed sovereign borrowers must pay.
SNB’s Franc Defense Swells Reserves to 71% of GDP
The
Swiss central bank’s foreign- currency reserves surged to a record in
July as the euro region’s increasing turmoil forced policy makers to
step up their defense of the franc ceiling.
Switzerland’s cash pile swelled 11.3 percent in the month to 406.5
billion Swiss francs ($420 billion), the Swiss National Bank said on its
website today. That pushed holdings to 71 percent of gross domestic
product. Walter Meier, an SNB spokesman in Zurich, said “a large part”
of the increase resulted from currency purchases to defend the minimum
exchange rate.
SNB President Thomas Jordan has pledged to enforce the franc ceiling
of 1.20 per euro “with unlimited purchases of foreign currencies if
needed.” The central bank implemented the cap in September to fight
deflation and help exporters. Its reserves have soared 44 percent since
the end of that month, according to SNB data calculated to International
Monetary Fund standards.
“The SNB can keep its pace of interventions for a pretty long time
unless there is a massive disruption like the collapse of the euro
area,” said Maxime Botteron, an economist at Credit Suisse Group AG
(CSGN) in Zurich. “As they increase liquidity through their purchases,
the only limiting factor is inflation. However, that is not a concern at
the moment."
SNB’s $380 Billion Pile Makes Jordan Wonder
Swiss
central bank President Thomas Jordan is wondering how to invest his
currency reserves as euros pile up at the bank at a record pace.
“The SNB has the same problem as lots of wealth managers,” said
Ursina Kubli, an economist at Bank Sarasin in Zurich. “Safe assets have
become very expensive. So for the time being, they prefer cash over
investing.”
With Europe’s debt crisis hurting returns on the least risky bonds,
the Swiss National Bank is keeping reserves in cash after its policy to
cap the franc swelled currency holdings by 50 percent in the four months
through June to a record 365 billion francs ($380 billion). Money held
at central banks, the International Monetary Fund and the Bank for
International Settlements accounted for 72 percent of the gain.
The SNB has been piling up euro holdings to defend the franc ceiling
of 1.20 versus the single currency introduced in September 2011. While
the central bank previously mainly invested foreign currencies in
government bonds of AAA-rated nations, the surge in cash reserves
suggests policy makers are finding it more difficult to find the right
investments.
