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Welcome to the Currency War, Part 15: Europeans Ordered to Start Consuming

For the past couple of years the European Central Bank has been the only sane inmate in the asylum. Unfortunately, in a crazy world being sane just gets you into trouble. Sound monetary policy leads to a strong currency, which in a currency war is tantamount to unilateral disarmament. Unable to export sufficiently to a world of weak currencies, the eurozone is tipping into deflationary depression (with several members already there and unable to get out). So…

Draghi Hunts for QE Assets in ‘Dead’ Market

Mario Draghi’s asset-purchase plan to ward off deflation may be lacking one key element: enough assets to buy.

Since the European Central Bank President buoyed investors last week by saying policy makers backed quantitative easing as a way to boost prices if needed, officials including Governing Council member Ewald Nowotny have signaled any purchases may center on asset-backed securities. While that makes sense in an economy funded mostly by bank loans, it’s also a market Draghi once described as “dead.”

The ECB’s focus on ABS for monetary easing risks guiding it toward a policy that might be slow to evolve and far smaller than the 1 trillion euros ($1.4 trillion) in bond purchases it has already simulated. Draghi has said international regulators must change the rules on ABSs, yet those officials are steering against the easy creation of complex products because of the role they played in the global financial crisis.

“A preference for ABSs has been expressed time and again – – and in fact it is the first asset class that would make sense for the ECB to buy,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “The market’s revival is conditional on the regulator changing capital requirements. Until this changes, jump-starting the ABS market is difficult and demand for these securities will remain weak.”

Total issuance of securitized assets in Europe was 250.9 billion euros in 2012, compared with the equivalent of 1.55 trillion euros in the U.S., according to data compiled by the Association for Financial Markets in Europe. Issuance in the first half of 2013 was 83.5 billion euros in Europe and 880 billion euros in the U.S. Moreover, some European securitizations are used as collateral against loans from the central bank, making them unavailable for an ECB purchase program.

The total of European issuance would be dwarfed by the size of at least one QE simulation run by the ECB. Officials ran models testing the impact of purchases of 1 trillion euros of bonds, a person with knowledge of the matter told Bloomberg News on April 4.

Large Pool
Greece’s central bank governor, George Provopoulos, said in an interview yesterday that the ECB Governing Council is now “reflecting” on the design of a quantitative-easing program.

The ECB is “unanimously committed to using all instruments within its mandate, conventional and unconventional, to deal effectively with the risks of a too-prolonged period of low inflation,” he said in Athens.

Draghi said on April 3 that the ECB could access a bigger pool of securitized bank loans if only there was a more-liquid market in which to do so. The total stock of outstanding loans in the euro area was 17 trillion euros at the end of 2013, according to ECB data.

“If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis, then we naturally have a very large pool of assets,” he said at his monthly press conference.

Joint Paper
The ABS market can only function better with the help of rule-setters including the Basel Committee on Banking Supervision and the European Union, officials say. The central bank has said that current capital requirements are too strict for banks holding ABS.

“It is clear to everyone that the ECB feels that EU ABSs are being treated inappropriately by present regulations and proposals,” Executive Board member Yves Mersch said on April 7. The ECB and the Bank of England will present a joint paper on revamping ABS regulation this week at the Spring meetings of the International Monetary Fund in Washington.

Some thoughts
To create an asset-backed bond, a consumer or business has to first take out the kind of loan that can be packaged into a bond. So the underlying point of the ECB buying such bonds is to convince Europeans to borrow more money on cars and houses.

Not so long ago the idea of a central bank buying asset-backed bonds would have been seen as both dangerously experimental and as crossing a line into industrial policy, where the government intervenes in the marketplace to pick winners and losers. In the US case, the Fed buying mortgage-backed bonds is an explicit subsidy to housing and the banks that depend on it. The result: more Americans are buying homes they probably can’t afford and the big banks — because their too-big-to-fail status makes them in effect government-guaranteed entities able to borrow at artificially-low rates — are taking an even-more-dominant share of the mortgage business. In no rational world could this be seen as a proper or wise use of taxpayer resources.

In Europe the effect will be similar, with central bank asset-backed bond purchases subsidizing the big banks that originate and package the loans. That the European ABS market is currently small means that the ECB will be explicitly directing its citizens to borrow more money from banks, which will then package those loans into bonds and, in effect, sell those bonds to taxpayers (the people who were directed to borrow the money in the first place). Again, in no rational world is this logical or sound policy.

And yet this is how the currency war is being fought. The euro is too high due to Europe’s excessive debt and the ECB’s previous reluctance to inflate those debts away. This is pushing the Continent’s worst-run countries (of which there are many) into a deflationary spiral from which they can’t escape with the euro worth $1.35. So from the point of view of politicians who want to be reelected, the only solution is a cheaper currency achieved via a much higher money supply, which in turn is achieved by encouraging the banking system to write more loans.

Nothing about this is new, other than the entities making the policy mistakes. If the ECB succeeds in pushing the euro down to, say, $0.90, then France, Italy and Spain will stabilize while failed US states like California and Illinois implode. And the focus will shift back to the dollar, leading to a new round of Federal Reserve QE, and so on. With each iteration the total amount of global debt will rise, making the required monetization and market manipulation that much more extreme, until, finally, the major economies realize that the only kind of devaluation that sticks will be against gold.

I’ll go out on a limb and predict that well before the end of this decade a new monetary regime will be announced in which all the major currencies are linked to gold at an exchange rate equivalent to $10,000/oz. Everyone with fiat currency savings will lose 80% of their purchasing power, while everyone with hard asset savings will see a commensurate increase in real wealth.

Assuming, of course, that governments allow this wealth transfer to take place. By the time monetary panic makes a new gold standard conceivable, lots of other things, like wealth taxes and asset confiscations, will also be on the table. So buying hard assets is just the first, easiest step. Keeping them will take a lot more thought and planning.

23 thoughts on "Welcome to the Currency War, Part 15: Europeans Ordered to Start Consuming"

  1. Pingback: The Küle Library
  2. The USA dollar will collapse on Monday morning as nobody accepts it anymore.
    Everyone will be able to find a good job when MERKEL is toppled on Monday morning.

    We do not accept the fascist USA 1773 Rebellion against The Royal
    Navy and the USA has absolutely no right to exist, let alone to go
    around dominating the landscape. NAZI Germany was defeated
    in 1945 and the 4th reich of the EU will be defeated in 2014.

    We do not forgive. We do not forget. World Peace with NOUSA

    God Save The Queen. Absolutely NO EU and USA fascist R€GIM€$.

  3. The idea of diluting your own currency to effectively lower the prices of your exports has always struck me as preposterous. Relative currency prices can’t possibly affect relative prices of goods and services across currency boundaries except temporarily. If a European exporter makes a product that sells for 1 Euro and the Euro is priced at $1.35, then the American has to pay $1.35 for that product. If the Eurozone dilutes its currency to force the price of the Euro down to $1.30, then this inflation results (eventually) in a increase the price of the item in Euros. The item’s price after the dilution percolates through the Eurozone must eventually rise to about E1.04. Now the American pays an exchange rate of $1.30 per Euro but the price of the item is E1.04, so it’s a wash, i.e. the American still ends up paying $1.35 for the product. The exporter is fooled into temporarily selling larger quantities at what will ultimately be determined to be a lower margin or a loss, and ultimately both the exporter and the Eurozone end up losers due to the other adverse affects of the inflation. Weakening your currency to match the collapse of the dollar is like chaining your freighter to the hull of the sinking Titanic: the only possible result is that you both end up at the bottom of the sea.

  4. This article has 2 SERIOUS mistakes

    1) You will never inject money into the european system by giving more loans to the people. People cannot get loans when they are unemployed and with falling wages.
    80% of the people in socialist europe totally life depend one way or another from the state

    so it is the state the only player that can inject that money (hire more public workers, increase pentions, more construction projects etc)

    So either the QE is to buy national debts or there will be no QE at all.

    2) Gold ? gold doesn’t play a major part in the world anymore… it is not vital for anything
    gold is a myth. Why not radium ? or europium ? or tantalum ?

    1. Johnny,

      Yes you can inject money into the European system by GIVING loans to the people. If the point is to inject money then their ability to repay the loan is secondary. Furthermore, those entities (i.e., banks) that give the loans can then sell them to, say, the ECB thus offloading their liability onto the Eurozone citizens at large.

      2) Rather than express my dismay that you think gold is passe, I’ll grant you that position, and thus say that your opinion is greatly outnumbered. Whether “true” or not, the great majority of the world’s inhabitants (mostly in east Asia) believe gold is very valuable if not the standard of monetary value. Radium, europium, “tantalum” or most other things do not meet the requirements of money as much as gold does.

    2. I heartily agree with both of Bruce’s points, well said. Anyone who looks back at
      ninja and liar loans knows that once the governments and central banks backstop the loans, the banks no longer care who they’re loaning to. Got a pulse? Get in line.

      Arguments that gold is an arbitrary choice simply ignore history. If history matters then gold and silver will always have an enormous advantage over other possible core commodities / forms of money. To say history doesn’t matter sounds like the
      canary-in-a-coal-mine saying: “It’s different this time!”

      And as a minor point, it should be obvious why we don’t want to use radium as
      money. Sheesh. Chemical properties do matter. They’re why we chose gold and silver in the first place, thousands of years ago.

  5. The accepted version of history is that the Federal Reserve was created to stabilize our economy. One of the most widely-used textbooks on this subject says: “It sprang from the panic of 1907, with its alarming epidemic of bank failures: the country was fed IT once and for all with the anarchy of unstable private banking.” Even the
    most naive student must sense a grave contradiction between this cherished view and the System’sactual performance. Since its inception, it has presided over the crashes of 1921 and 1929; the Great Depression of ’29 to ’39; recessions in ’53, ’57, ’69, ’75, and ’81; a stock market “BlackMonday” in ’87; and a 1000% inflation which has destroyed 90% of the dollar’s purchasing POWER

    3
    Let us be more specific on that last point. By 1990, an annual income of $10,000
    was required to buy what took only $1,000 in 1914.4 That incredible loss in value was quietly transferred to the federal government in the form of hidden taxation, and the Federal Reserve System was the mechanism by which it was accomplished.

    Actions have consequences. The consequences of wealth confis- cation by the Federal-Reserve mechanism are now upon us. In the current decade, corporate debt is soaring; personal debt is greater than ever; both business and personal bankruptcies are at an all-time high; banks and savings and loan associations are failing in LARGER NUMBERS THAN EVER BEFORE

    1.
    Quoted by Kolko, Triumph, p. 235.

    2. Paul A. Samuelson, Economics, 8th ed. (New York: McGraw-Hill, 1970), p. 272.

    3. See “Money, Banking, and Biblical Ethics,” by Ronald H. Nash, Durell Journal of Money and Banking, February, 1990.

    4. When one considers
    that the income tax had just been introduced in 1913 and that such low
    figures were completely exempt, an income at that time of $1,000 actually was the
    equivalent of earning $15,400 now, before paying 35% taxes. When the amount now
    taken by state and local governments is added to the total bite, the figure is close to
    $20,000.

    interest on the national debt is consuming more than half of our personal income tax;
    heavy industry largely has been replaced by overseas competitors; we are facing an international trade deficit for the first time in our history; 75% of downtown Los Angeles and other metropolitan areas is owned by foreigners; and the nation is in economic recession

    FIRST REASON TO ABOLISH THE SYSTEM

    That is the scorecard eighty yearsafter the Federal Reserve was created supposedly to stabilize our economy! There can be no argument that the System has failed
    in its stated objectives. Furthermore, after all this time, after repeated changes in person­nel, after operating under both political parties, after numerous experiments in monetary philosophy, after almost a hundred revisions to its charter, and after the development of countless new formulas and techniques, there has been more than ample opportu­nity to work out mere procedural flaws. It is not unreasonable to conclude, therefore, that the System has failed, not because it needs a new set of rules or more intelligent directors, but because it is incapable of achieving its stated objectives.

    If an institution is incapable of achieving its objectives, there is no reason to preserve it—unless it can be altered in some way to change its capability. That leads to the question: why is the System incapable of achieving its stated objectives? The painful
    answer is: those were never its true objectives. When one realizes the circum­stances under which it was created, when one contemplates the identities of those who authored it, and when one studies its actual performance over the years, it becomes obvious that the System is merely a cartel with a government facade. There is no doubt that those who run it are motivated to maintain full employment, high productivity, low inflation, and a generally sound economy. They are not interested in killing the goose that lays such beautiful golden eggs. But, when there is a conflict between the public interest and the private needs of the cartel—a conflict that arises almost daily—the public will be
    sacrificed. That is the nature of the beast. It is foolish to expect a cartel to act in any
    other way. This view is not encouraged by Establishment institutions and publishers. It has become their apparent mission to convince the American people that the system is not intrinsically flawed. It merely has been in the hands of bumbling oafs. For example,

    William Greider was a former Assistant Managing Editor for The Washington Post. His book, Secrets of The Temple, was published in 1987 by Simon and Schuster. It was critical of the Federal Reserve because of its failures, but, according to Greider, these were not caused by any defect in the System itself, but were merely the result

    of economic factors which are “s000 complicated” that the good men who have struggled to make the System work just haven’t been able to figure it all out. But,
    don’t worry, folks, they’re working on it! That is exactly the kind of powder-puff criticism
    which is acceptable in our mainstream media. Yet, Greider’s own research points to an entirely different interpretation. Speaking of the System’s origin, he says:

    As new companies prospered without Wall Street, so did the new regional banks that handled their funds. New York’s concentrated share of bank deposits was still huge, about half the nation’s total, but it was declining steadily. Wall Street was still “the biggest kid on the block,” but less and less able to bully the others.

    This trend was a crucial fact of history, a misunderstood reality that completely alters the political meaning of the reform legislation that created the Federal Reserve. At
    the time, the conventional wisdom in Congress, widely shared and sincerely espoused by Progressive reformers, was that a government institution would finally harness the “money trust,” disarm its powers, and establish broad democratic control over money and credit…. The results were nearly the opposite. The money reforms enacted in 1913, in fact, helped to preserve the status quo, to stabilize the old order. Money-center
    bankers would not only gain dominance over the new central bank, but would also enjoy new insulation against instability and their own decline. Once the Fed was in
    operation, the steady diffusion of financial power halted. Wall Street maintained its dominant position—and even enhanced it. 1

    Antony Sutton, former Research Fellow at the Hoover Institu­tion for War, Revolution and Peace, and also former Professor of Economics at California State University, Los Angeles, provides a somewhat deeper analysis. He writes:

    Warburg’s revolutionary plan to get American Society to go to work for Wall
    Street was astonishingly simple. Even today,… academic theoreticians
    cover their blackboards with meaningless equations, and the general public
    struggles in bewildered confusion with inflation and the coming credit collapse, while
    the quite simple explanation of the problem goes undiscussedand almost entirely uncomprehended

    1. Greider, p. 275.

    the
    problem goes undiscussed and almost entirely uncomprehended. The
    Federal Reserve System is a legal private monopoly of the money supply
    operated for the benefit of the few under the guise of protecting
    and promoting the public interest.1

  6. do like Reagan…….. give it to the people….they will spend it into the economy….why do they always give it to banks to speculate with ?

  7. It is not a good sign that the price of W. TX crude is $103/bbl, and Brent is $4 higher, with little world wide economic growth. That tells you right there that this is the best it can get. Actually, it will get progressively worse, as the last of the legacy cheap oil is produced and burned.

    It is my understanding that the biggest chunk of debt is in the form of unpayable social security, medicare, veterans, fed. govt. workers’ pension, and medicaid benefits. How can social security and medicare debts be written down? Seems like it would easier to put people in squalid camps than to cut their monthly retirement pay in half and their health care coverage by 9/10.

    There are some huge economies of scale that could be achieved in the USA, carpooling comes to mind, but they would require some sort of autocratic communist govt. Given what happened in the USSR and is happening now in Venezuela, socialist governments just don’t have a very good track record.

    My guess is that they don’t have an exit strategy and are just winging it. If they do have a long term plan, it cannot possibly involve the continued presence of 7 billion breathing humans living on the surface, accept as part of some ‘pyramid’ type building project. Given the state of the robotics and heavy equipment industries, that seems unlikely.

    1. That’s funny. I nearly always chuckle to myself when an American (and I’m making the assumption you are) makes any mention, whatsoever, of Socialism. You guys appear to have the collective ability to neither understand the actual meaning of the word, realise you’re already living in the most socialist/fascist country on Earth or admire other countries that have embraced milder forms of Socialism and who’s standards of living and general economic health are far better than those that currently exist in the US. The irony is sweet. But then, being American, you wouldn’t understand that either….

  8. I think ECB will not go that way. It did not do that in the worst moment of the crises and will not do it now. European public finances are in a much better shape at the moment and path to growth will be link to European bonds that, given the current FED, BoE and BoJ policies, will be the only safe place where to put money.

    1. If Europe doesn’t print money in some way or another, the Eurozone can say goodbye to Greece and look forward to the fascist revolution there, Spain can say goodbye to Catalonia, the EU can forget about absorbing any more Eastern European nations into the common currency, France will begin anti-immigrant policies which cause civil unrest, and so on. That’s the rock and a hard place that they’re stuck in.

  9. Believe it or not, for all of this sophisticated analysis, I’d like to know why a “consumer” would borrow any money at this point – even at literally zero or lower (i.e., “negative) interest rates – unless they intend to never pay it back. And in case that’s obvious to everyone (i.e., the ECB et al) then why not just deposit the money into citizen’s accounts and be done with it? I’d love to see how such a blatant capitulation would play out. After all, would “investors” recoil in horror and sell out of the markets, or would they rally because all that free money would buy all kinds of shit and create corporate profits? It’s a vomitous cluster-f__k any way you look at it. Eurozone, Japan, Eurozone, Japan… I just can’t decide which entity is more deserving. Probably Europe because they are so full of it.

  10. So how do you say Special Drawing Rights? The Fed has $4 trillion on the books and when the next crisis comes, and is, the IMF will bailout the too big to fail banks, providing liquidity. So we’re still paddling up the river with one paddle, and it won’t be to long until both paddles are gone and reset time will come, as in a World Depression. There is coming socical unrest and that may frighten the oligarchs to do something before then, like write down the debts and start over, but no one in the political class, except maybe a few politicians like Warren, who knows what’s happening, but they are not listened to because debt speaks louder than actually fixing the problem.

    1. Well, you say “Special Drawing Rights.” The coming socIal unrest is brought to us BY the oligarchs. Out of chaos, a new world order. Join them, Dan! There are MANY benefits to working for the anti-christ: good health plan, free parking, etc. I agree on Warren. The best election would be Elizabeth Warren vs. Rand Paul, two decided anti-war candidates. Hillary vs. Jeb = WW3!

      1. Well take that NWO bull crap and hide it where Obama bin Dictator is tallest when picking strawberries.

        Though i do not say that you are wrong, but the is a diff between NWO and OWO

        What you need to fear is the Old World Order. Where people become slaves, where the few command the masses. thats how it used to be. eg. Rome or w/e old ancient empire you can think of. a REAL NWO would be comparable to paradise. A world where, lets say machines do most manual labor, people enjoy REAL freedom, money do not exsist. all goods are free, energy is free and clean.

        Just imagine a world where you and I, and then what people are free to think and believe what WE want, noone having a malfunctional through gov controlled media imprinted idea or oppinnion about it. that my frined is the REAL NWO. Hitler Clinton does not belong to or work for the NWO or Illuminatii She is OWO/Circle of Lucifer material. Illuminatii is in my idea more like this http://armageddonconspiracy.co.uk/The-Illuminati(903482).htm

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