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:

  • What Do “Think Tanks” Think About?
      “Russiagate” WEST RIVER, MARYLAND – We’re back at our post – watching... reading... trying to connect the dots. And we begin by asking: What do “think tanks” think about? The answer in a minute. First, there is a dust-up in the Washington, D.C., area. “Russiagate,” it is called. As near as we can make out, some people think the Trump team had or has illegal or inappropriate contacts with the Russian government.   It's all very obvious, if one looks...
  • Parabolic Coin
      The Crypto-Bubble - A Speculator's Dream in Cyberspace When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is...
  • In Gold We Trust, 2017
      The 11th Annual In Gold We Trust Report This year's Incrementum In Gold We Trust report by our good friends Ronald Stoeferle and Mark Valek appears about one month earlier than usual (we already mentioned in our most recent gold update that it would become available soon). As always, the report is extremely comprehensive, discussing everything from fundamentals pertaining to gold, to technical analysis to statistical studies on the behavior of gold under different economic...
  • Quantitative Easing Explained
      [Ed. note: This article was originally posted in November of 2010 - we have decided to republish it with updated charts, as it has proved to be very useful as a reference - the mechanics of QE are less well understood than they should be, and this article explains them in detail.]   Printing Money We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing.  They range from the truly funny as in this by now 'viral' You Tube...
  • The Three Headed Debt Monster That’s Going to Ravage the Economy
      Mass Infusions of New Credit   “The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath   Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down...
  • Recession Watch Fall 2017
      One Ear to the Ground, One Eye to the Future Treasury yields are attempting to say something.  But what it is exactly is open to interpretation.  What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.   Behold, the risk-free tide...   Are investors anticipating deflation or inflation?  Are yields adjusting to some other market or...
  • Stocks, Bonds, Euro, and Gold Go Up – Precious Metals Supply and Demand
      Driven by Credit The jobs report was disappointing. The prices of gold, and even more so silver, took off. In three hours, they gained $18 and 39 cents. Before we try to read into the connection, it is worth pausing to consider how another market responded. We don’t often discuss the stock market (and we have not been calling for an imminent stock market collapse as many others have).   NYSE margin debt has reached new record highs this year, dwarfing previous peak...
  • Jayant Bhandari on Gold, Submerging Markets and Arbitrage
      Maurice Jackson Interviews Jayant Bhandari We are happy to present another interview conducted by Maurice Jackson of Proven and Probable with our friend and frequent contributor Jayant Bhandari, a specialist on gold mining investment, the world's most outspoken emerging market contrarian, host of the highly regarded annual Capitalism and Morality conference in London and consultant to institutional investors.   As soon as Jayant touches down in London, he is accosted by...
  • Monetary Madness and Rabbit Consumption
      Down the Rabbit Hole “The hurrier I go, the behinder I get,” is oft attributed to the White Rabbit from Lewis Carroll’s, Alice in Wonderland.  Where this axiom appears within the text of the story is a mystery.  But we suspect the White Rabbit must utter it about the time Alice follows him down the rabbit hole.   Pick a rabbit to follow...   No doubt, today’s wage earner knows what it means to work harder, faster, and better, while slip sliding behind. ...
  • Mexicans and Chinese Aren’t “Stealing Our Jobs”
      Tremendous Flop GUALFIN, ARGENTINA – Now comes a report from the Financial Times that tells us the nation’s No. 1 industry – home building – has been backing up for a quarter of a century. According to the newspaper, U.S. home builders “started work on the same number of houses in the past year as they did a quarter of a century ago, even though there are 36% more people working as residential builders now than then.”   Moat contractors have been particularly bad....
  • The Anatomy of Brown’s Gold Bottom – Precious Metals Supply and Demand
      The Socialist Politician-Bureaucrat with the Worst Timing Ever As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold... or does it?   Former UK chancellor of the...
  • Donald Trump is an Economic Ignoramus on Trade
      Upholding a Well-Worn Tradition Not surprisingly, Donald Trump has followed in the infamous footsteps of his presidential predecessors in the transition from candidate to chief executive.  Invariably, every candidate for the presidency makes a whole host of promises, the vast majority of which are horrible and typically only exacerbate the problems they attempt to resolve.   With respect to trade, Donald Trump has adopted a position that is essentially indistinguishable...

Support Acting Man

Austrian Theory and Investment

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