Sovereign Bond Buying by ECB No Longer Taboo

Reuters reports that the governor of Belgium’s central bank and ECB council member Luc Coene has come out in support of full-fledged quantitative easing by the ECB in the form of sovereign bond purchases. Not surprisingly, he too is singing from the “deflation danger” hymn sheet:

 

“The European Central Bank should start buying government bonds to tackle poor investor confidence and low inflation in the euro zone, governing council member Luc Coene said in an interview published on Saturday.

The Belgian central bank chief said the bank had already waited too long, and that this could be one tool to spur economic activity in the 18-country euro zone and fight off deflationary pressures.

“In this context, the purchase of sovereign bonds could prove to be an effective tool,” he told La Libre Belgique.

“Since the beginning of 2014, we have systematically underestimated deflationary effects…if we were to find ourselves at the beginning of next year with negative inflation and fall into a deflationary spiral, the effects on the behavior of households and businesses could be very negative.”

Inflation in the single currency area was 0.3 percent year-on-year in November, well below the ECB’s headline target of inflation below, but close to 2 percent.

 

(emphasis added)

As we pointed out last week, the only central banker in Europe who hasn’t yet completely lost his mind over the alleged “danger” of the prospect of ever so slightly declining consumer prices is BuBa chief Jens Weidmann (see: “Mr. Nein” for details).

Moreover, prices are in fact not (yet) declining in the euro area overall. There are of course differences from country to country, with mildly declining prices recorded in several of the “crisis countries” – which is to say, precisely the countries that most urgently need lower prices – while prices are rising rather rapidly in others (e.g. in Austria, the annual change rate in CPI is close to the 2% target that allegedly produces economic bliss).

There are several more signs that the ECB is getting ready to crank up the printing presses for real. Not only is it clear that the securities purchase programs currently underway won’t suffice to blow up its balance sheet by the planned amount of € 1 trillion, but it seems that Germany’s central bank may give its nod to sovereign bond “QE” if the peripheral countries agree to take on relatively more risk.

 

Luc-CoeneLuc Coene stands ready to grab imaginary deflation by the throat.

Photo credit: Belga

 

As an aside to this, since we mention the figure of € 1 trillion above, it has occurred to us that when one talks about money, debt, monetary policy, derivatives, etc., these days, the numbers used in these contexts are of a size that not too long ago was held to be the sole preserve of astronomy.

We therefore propose to introduce the parsec into financial lingo in preparation for the next few decades. The parsec is an astronomical measure of distance, amounting to approximately 3.26 light years, or 31 trillion kilometers, resp. 19 trillion miles. A parsec of euros would e.g. be a stack of 10 euro notes of one parsec in height (which would be about 69 parsecs of 10 ruble notes at the current exchange rate).

 

1-HICP-euro area+y-y-change rateThe euro area’s “harmonized index of consumer prices” (HICP) and its year-on-year change rate. As you can see, money in the euro area has lost a lot of its purchasing power since 1990, even using official data. Evidently it is not a very useful store of value. Nevertheless, allegedly more euro need to be printed urgently – click to enlarge.

 

Full-Fledged QE by ECB Becomes More Likely with Germany Naming Conditions

According to a Reuters report published last week, the ECB is trying to find ways of getting the “hawks” who are distrustful of sovereign bond purchases on board, by tying QE to certain conditions with respect to risk sharing. Here are a few pertinent excerpts from the report:

 

“European Central Bank officials are considering ways to ensure weak countries that stand to gain most from a fresh round of money printing bear more of the risk and cost. Officials, who spoke on condition of anonymity, have told Reuters that the ECB could require central banks in countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds.

Such a move could help persuade a reluctant Germany to back plans to buy state bonds.

There is currently a stand off between the ECB and Germany’s Bundesbank over ECB preparations to buy sovereign bonds, so-called quantitative easing (QE), to shore up the flagging euro zone economy.

But while the idea may help overcome opposition in Germany, which is worried that fresh money printing could encourage reckless spending and leave it to pick up the tab, critics will argue that any such conditions curtail its scope and impact.

[…]

The national central banks would most likely be the ones tasked with buying their country’s bonds, as part of a wider ECB program. While easing the burden on countries like Germany whose bonds are highly rated, the ECB could place a heavier burden on more risky countries such as Greece, requiring them to set aside more money in order for the ECB to buy their debt.

It now costs roughly 1.1 million euros ($1.35 million) to insure 10 million euros of Greek bonds against default, for example, making it roughly half as risky as war-torn Ukraine.

[…]

The Bundesbank is demanding that any new round of bond buying be subject to strict limitations. Its president, Jens Weidmann, this week outlined two such possibilities – restricting ECB buys to bonds of countries with a top-notch credit rating or allowing each central bank to buy their country’s bonds at their own risk.

 

(emphasis added)

As far as we can tell, this makes little practical difference, mainly because the political class in Europe won’t allow any of the countries in fiscal difficulties to default anyway. This means that the only risk is that of a sudden loss of confidence in the currency as such, a fate which all central banks engaging in QE are tempting. The greatest risk to the euro experiment in the medium term however remains that at some point a political party that rejects the euro could be elected and upset the apple cart.

As we have pointed out recently, in spite of the fact that there is a real risk now that Syriza could soon become Greece’s biggest party in parliament (keep in mind that the winning party in a Greek election automatically receives an additional 50 of the 300 parliamentary seats available), the party no longer plans a return to the drachma. It is different – at least for the time being – with the Front National in France and Beppe Grillo’s 5-Star movement in Italy, both of which are rejecting the euro outright.

So from a practical perspective, what counts about the above is actually not the distribution of risk among national central banks in the euro system. Rather, it is the fact that apparently a method is being prepared that will enable the ECB to engage in sovereign bond purchases in a manner that allows the BuBa to save face. We conclude from this that full-fledged QE is indeed coming to the euro area shortly. Manipulating the market with ZIRP, combined with NIRP, TLTROs, covered bond purchases and ABS purchases is evidently no longer considered sufficient.

2-ECB policy rates

The ECB’s main refinancing rate (currently at a princely 0.05%) and the deposit facility rate (currently at a negative 0.20%) – click to enlarge.

 

Almost needless to say, in spite of relatively tame HICP data, monetary inflation in the euro area is actually quite lively:

 

3-euro area M1Euro area, M1 (= TMS) – currency and demand deposits. Lately growing at well above 6% year-on-year, after a slight slowdown between mid 2013 to mid 2014 – click to enlarge.

 

As to the legality of sovereign bond purchases by the ECB, here is the relevant passage from the treaty that governs what the ECB may or may not do:

 

Article 21

Operations with public entities

21.1. In accordance with Article 123 of the Treaty on the Functioning of the European Union, overdrafts or any other type of credit facility with the ECB or with the national central banks in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

 

(emphasis added)

Careful reading and a bit of cogitation over this passage prohibiting fiscal financing by the ECB has led us to conclude that all that is really prohibited are direct purchases of government debt from governments and their agencies, i.e., purchases in the primary markets. The buying of government bonds in secondary markets is not explicitly prohibited, even though the difference is largely technical (in theory commercial banks would end up with even larger reserves they could then use to pyramid credit upon if the central bank were to buy newly issued debt directly from governments. We discussed why such a prohibition also exists for the Fed in “QE Explained” back in 2010).

Curiously, ECB council members seem to be aware that no lasting economic growth can be conjured up by money printing – at least that is what is usually suggested in their often repeated calls regarding the necessity of structural economic reforms in the euro area. This leaves one wondering why they would bother to print additional money anyway – obviously, the true reasons are not openly stated.

 

Conclusion:

More money printing is very likely on the way in the euro area. The result will likely be another false dawn that will be hailed as an economic recovery, even while prices and with them economic calculation will be falsified and structural distortions in the economy will continue to pile up.

 

Charts by: ECB
 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “Money Astronomy”

  • mantrid:

    “The national central banks would most likely be the ones tasked with buying their country’s bonds, as part of a wider ECB program.”

    that actually sounds more like setting the stage for dismantling TARGET2

  • No6:

    What is the use of Law, constitutions or conventions. In the new world order Power is all that matters, and that is bought and payed for. They don’t care what Article 21 says, it was simply a sop to getting the single currency enacted, expertly written to seem to say something but actually says nothing.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • India: Still the Fastest Growing Large Economy?
      India’s Currency Ban - Part X It has now been four months since Narendra Modi declared about 86% of monetary value of currency illegal. Linked here is the last in my series of updates, which was written soon after the deadline to deposit the demonetized currency. Most of the banned currency was eventually deposited, making a mockery of Modi, who had claimed that unaccounted money would not reach the banks.  Perhaps 3% of the cash never reached the banks.   A cunning plan...
  • Gold Sector: Positioning and Sentiment
      A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
  • Welcome to Totalitarian America, President Trump!
      Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed.   Image adapted from the cover of “Deep State #5” - depicting an assassin from the future   President Trump joins the very crowded list of opponents of the American...
  • India: The next Pakistan?
      India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.   The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo   Tribal cultures face...
  • The Long Run Economics of Debt Based Stimulus
      Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.   What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only...
  • Boosting Stock Market Returns With A Simple Trick
      Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends.   Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
  • Searching for Truth
      Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth?   Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
  • Why the 21st Century Sucks - Turtles All the Way Down
      A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
  • Gold and the Fed's Looming Rate Hike in March
      Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
  • March to Default
      Style Over Substance “May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”   Well, Maxine Waters is obviously right – impeaching the president is an urgent...
  • Off the Beaten Path in Mesoamerica
      Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse.  There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance.  The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings.   Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
  • Why Silver Went Down – Precious Metals Supply and Demand
      Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.   Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School'   The facile answer is...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com