It seems that Janet Yellen and Angela Merkel are both under attack for offering to provide shelter. Yellen, for offering to shelter investors, and Chancellor Merkel refugees from war-torn countries. Chair Yellen has sparked a heated discussion about the possibility of negative rates in the U.S. as the Fed tries, yet again, to provide a calm port for debtors being tossed about by the lack of any inflation to relieve the burdens of too much debt. Nothing like a good currency debasement to ease the pressure of debt on a society’s balance sheets. The longer the central banks repress savers without igniting the flames of inflation the more detrimental the ZIRP and possibly NIRP (negative interest rate policy). If savers are receiving nothing on their earnings and inflation is not providing debt relief, the entire financial system seems to stagnate and that is apparently what is happening worldwide. This is the ultimate liquidity trap and the fear of central banks having no answers is at the top of the list of investor concerns. I warned about this possible outcome for many years and now it seems the possibility is becoming reality.
Complicating the situation for the ECB and Mario Draghi is the fact that German Chancellor Merkel has overextended her popularity by accepting a massive amount of refugees into Germany. This has aroused the anger of an electorate suffering under the burden of being the creditor for the entire EU project. Negative interest rates have financially repressed the middle class German savers and also wreaked havoc on German banks, pension funds and insurance companies. There are regional elections in Germany in mid-March and the results will be important to see how unpopular Chancellor Merkel has become and whether it is the AfD (Party for Deutschland) that has garnered renewed support. Again, President Draghi needs the strength of Angela Merkel to defend the ECB‘s policies against the criticism from the German hard-money crowd and especially Bundesbank President Jens Weidmann.
In today’s London Telegraph, there is an important column by Ambrose Evans-Pritchard titled, “German ‘Bail-In’ Plan For Government Bonds Risks Blowing Up the Euro.” Evans-Pritchard cites one of the five wise men of the German Council of Economic Advisers, Peter Bofinger, who suggests a new German plan to “… impose ‘haircuts’ on holders of eurozone sovereign debt risks….” This is an issue I’ve discussed over the years in this blog for currently under BIS regulations all sovereign debt carries a ZERO RISK WEIGHTING. Evans-Pritchard continues to write: “The German Council has called for a ‘sovereign solvency mechanism’ even though this overturns the financial principles of the post-war order in Europe, deeming such a move necessary to restore the credibility of the ‘no-bailout clause in the Maastricht Treaty.” Professor Bofinger is opposed to such a plan for it will of course ignite a bond and banking crisis across Europe as financial institutions are forced to raise even more capital because of the proscribed haircuts.
Any country that is subject to a “haircut risk” will see its debt sold by banks that do not want to be in a situation of having to raise even more capital in an already debt-stressed market. Professor Bofinger is adamant that the German Council is being very shortsighted and will create “… a self-fulfilling all too quickly, setting off a ‘bond-run’ as investors dump their holding to avoid a haircut.” As Evans-Prtichard warns, “The plan has the backing of the Bundesbank and most recently the German finance minister, Wolfgang Schauble, who usually succeeds in imposing his will in the eurozone. Sensitive talks are under way in key European capitals, causing shudders in Rome, Madrid and Lisbon.”
THIS PIECE BY EVANS-PRITCHARD IS VERY SERIOUS AND NEEDS TO BE WATCHED. Follow the European sovereign debt markets even though the pricing and signaling mechanism have been badly harmed by the ECB. If the Germans hold sway, Draghi’s whatever it takes to preserve the EURO will be retested and at -30 basis points and 60 BILLION EUROS OF QE A MONTH it will be a rough starting point for Draghi. A weakened Merkel has exposed a Mario Draghi under siege from a scorned Bundesbank. Merkel to Mario: Come in for shelter from the storm?
***As previously noted, yields on some of European sovereign debt have already begun to rise. Portuguese two-year yields have increased 150 basis points in the past month and Greek two-year yields reached 15% last week. This is reflecting new stresses in the sovereign bond markets but more important will be the yields on Spanish and Italian two-year notes.
***Quick history lesson: Today on the electronic media there was discussion of Chinese citizens sneaking money out of China by wrapping it around their bodies. It wasn’t long ago that Chinese smugglers would use TAELS, gold ribbons crafted by metal smiths that enabled one smuggling gold to wrap it in ribbon form around various parts of the body. So maybe rather than currency we will see a move to use gold as the item of choice.
***I’m Going to enjoy a few days of R&R but will be watching the world as there’s so much going on. Look back at the “Spark to Start a Prairie Fire” post because its relevance increases everyday (sadly to say). Be patient and keep your losses manageable and live to invest another day.
Tags: Angela Merkel, ECB, Fed, Germay, Janet Yellen, Mario Draghi, NIRP, QE, ZIRP
February 16, 2016 at 10:02 pm |
So let me see here… I could pay for the privilege of letting the central bank hold my money in “safekeeping” – one hose balance sheet consists largely of treasury bonds issued by a nation with 19 trillion of official debt and tens of trillions of unfunded debt obligations, yet is deemed to be free of credit risk only because it has the power to tax me more.
What could possibly go wrong?
February 16, 2016 at 10:58 pm |
Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away…
(Keith Richards/Mick Jagger)
February 16, 2016 at 11:06 pm |
Does Bofinger and the wise men actually thing a bond bail in would help Germany stem their losses to all the other ECB countries.
This bail in idea is way too late. It should have happened 5-7 years ago in both the Eurozone and America. Bondholders should have been forced to take haircuts instead of using taxpayer money to stem their losses.
The haircuts now are a non-starter. The PIGS would be back at the trough with markets cratering and yields in these countries back in double digits.
Draghi and the ECB have perpetuated this myth that PIGS are credit worthy and can be used as risk free for capital purposes and only a few hundred basis points different than bunds.
If this idea gains momentum forget about Negative Interest Rates at weaker Banks. Once bonds get bailed in, the next in line is deposit money gets bailed in/confiscated or converted to equity. Any weak bank will have a run because the risk is not the negative rate but the loss of major principle or freezing of principle due to the underlying weakness of the bank. Yes the very, very few strong banks or central banks may be able to get away with negative rates but the weak banks will offer higher yields to attract/keep deposits.
So is the Bofinger floating this trial balloon of bail ins as a red herring to help negotiate Germans position against stopping the influx of more refugees into Germany and sending them to other countries?
Or is this another strong arm play on austerity. And to mitigate some of German costs for the ECB.
If this idea gains momentum we are going to see some type of an instant replay of the European debt crisis again. I don’t think Draghi “whatever it takes” will be heard so clearly if at all. I am not sure the German wise men are so discerning.
All central bankers need to take a step back and recognize they are not omnipotent.
Central Bankers need to realize that negative interest rate violate basic rules of finance. A dollar today is worth more than a promise of dollar in one year, or in the future. These are well esteemed principles of finance taught universally for decades. Negative interest rates defy basic fundamentals of present value analysis.
One doesn’t need a Ph. D or MBA to understand this. You can go back to Deuteronomy in the Old Testament or Shakespeare’s Merchant of Venice. Lenders are paid interest for lending their money.
Central Banker attempt to turn the world on its head and say borrowers should be paid interest to borrow money is an absurdity.
Yra, you and Santelli nailed this!
February 17, 2016 at 5:34 am |
Frank–I believe Bofinger is opposed to the bail-in because it will blow the entire project up.He warns against it but the other Council members are aware of the dilemma facing Germany’s voters—as Otmar Issing put it so well two years ago in an op ed piece–“no taxation without representation”.The EU is so desperate to do whatever it takes that they will try to make david Cameron’s road to perfidy paved with realpolitick intentions in order to prevent any nation leaving —once the British referndum takes place more will follow and a disgruntled Bavarian Burgher is not the voter Draghi,Juncker ,Merkel,Hollande,Tsipras ,Renzi —seek
February 17, 2016 at 5:05 am |
“…and one sin leads to another sin”.(Ethics of the Fathers). You create a bubble, the bubble bursts, you flood the markets with liquidity, you introduce quantitative easing accompanied by ZIRP followed by NIRP, bail-ins are required, you outlaw cash, there is a run on the banks, etc., etc. etc.
The Law of Unintended Consequences is a truth the hubris of the professors have not learned. They play checkers, the markets play chess.
Look for the harried saver ultimately run to storable hard assets such as gold, silver diamonds…
A Central Bank note, IOU, will lose its place as a store of value.
February 17, 2016 at 6:28 am |
Yra, what do you think about all the talk of getting rid of cash? Now Larry Summers is chiming in about the $100 & $50 should go.
February 17, 2016 at 6:55 am |
Silverbug—read the Summer’s blog yesterday and this is a prelude to what the BOE’s Andy Haldane wrote about over the previous summer–if rates go negative all money will need to be electronic to insure its velocity and circulation –cash has to be banned or else there will be money left in the banks or the banks will go broke from the tax of negative yields not based on to savers—Larry Summer’s in typical harvard fashion is creating a straw man nothing more—for the same issue is being raised in Europe where they are contemplating getting rid od large bills and possibly limiting cash withdrawals to 5000 euros—-financial repression leads to tyranny from the hands of the arrogant—all with good intentions quoth the raven evermore
February 17, 2016 at 8:48 am |
[…] LINK HERE to the article […]
February 17, 2016 at 7:42 pm |
NIRP – Perhaps this is the buy gold short treasuries trade I’ve been anticipating?
February 18, 2016 at 10:01 pm |
Yra
You may be on holiday, but thought you would really enjoy this posted from Stephen Roach at Project Syndicate regarding Richard Koo and Balance Sheet Recessions.
Central Banking Goes Negative
NEW HAVEN – In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.
The adoption of negative interest rates – initially launched in Europe in 2014 and now embraced in Japan – represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand – primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds.
This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”
Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted GDP growth. It’s also the US, where consumer demand – the epicenter of America’s Great Recession – remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period.
All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.” As Paul Krugman noted nearly 20 years ago, Japan exemplifies the modern-day incarnation of this dilemma. When its equity and property bubbles burst in the early 1990s, the keiretsu system – “main banks” and their tightly connected nonbank corporates – imploded under the deadweight of excess leverage.
But the same was true for over-extended, saving-short American consumers – to say nothing of a eurozone that was basically a levered play on overly-inflated growth expectations in its peripheral economies – Portugal, Italy, Ireland, Greece, and Spain. In all of these cases, balance-sheet repair preempted a resurgence of aggregate demand, and monetary stimulus was largely ineffective in sparking classic cyclical rebounds.
This could be the greatest failure of modern central banking. Yet denial runs deep. Former Federal Reserve Chair Alan Greenspan’s “mission accomplished” speech in early 2004 is an important case in point. Greenspan took credit for using super-easy monetary policy to clean up the mess after the dot-com bubble burst in 2000, while insisting that the Fed should feel vindicated for not leaning against the speculative madness of the late 1990s.
That left Greenspan’s successor on a very slippery slope. Quickly out of ammunition when the Great Crisis hit in late 2008, former Fed Chair Ben Bernanke embraced the new miracle drug of quantitative easing – a powerful antidote for markets in distress but ultimately an ineffective tool to plug the hole in consumer balance sheets and spark meaningful revival in aggregate demand.
European Central Bank President Mario Draghi’s famous 2012 promise to do “whatever it takes” to defend the euro took the ECB down the same path – first zero interest rates, then quantitative easing, now negative policy rates. Similarly, Bank of Japan Governor Haruhiko Kuroda insists that so-called QQE (quantitative and qualitative easing) has ended a corrosive deflation – even though he has now opted for negative rates and pushed back the BOJ’s 2% inflation target to mid-2017.
It remains to be seen whether the Fed will resist the temptation of negative interest rates. But most major central banks are clinging to the false belief that there is no difference between the efficacy of the conventional tactics of monetary policy – driven by adjustments in policy rates above the zero bound – and unconventional tools such as quantitative easing and negative interest rates.
Therein lies the problem. In the era of conventional monetary policy, transmission channels were largely confined to borrowing costs and their associated impacts on credit-sensitive sectors of real economies, such as homebuilding, motor vehicles, and business capital spending.
As those sectors rose and fell in response to shifts in benchmark interest rates, repercussions throughout the system (so-called multiplier effects) were often reinforced by real and psychological gains in asset markets (wealth effects). That was then. In the brave new era of unconventional monetary policy, the transmission channel runs mainly through wealth effects from asset markets.
Two serious complications have arisen from this approach. The first is that central banks have ignored the risks of financial instability. Drawing false comfort from low inflation, overly accommodative monetary policies have led to massive bubbles in asset and credit markets, resulting in major distortions in real economies. When the bubbles burst and pushed unbalanced economies into balance-sheet recessions, inflation-targeting central banks were already low on ammunition – taking them quickly into the murky realm of zero policy rates and the liquidity injections of quantitative easing.
Second, politicians, drawing false comfort from frothy asset markets, were less inclined to opt for fiscal stimulus – effectively closing off the only realistic escape route from a liquidity trap. Lacking fiscal stimulus, central bankers keep upping the ante by injecting more liquidity into bubble-prone financial markets – failing to recognize that they are doing nothing more than “pushing on a string” as they did in the 1930s.
The shift to negative interest rates is all the more problematic. Given persistent sluggish aggregate demand worldwide, a new set of risks is introduced by penalizing banks for not making new loans. This is the functional equivalent of promoting another surge of “zombie lending” – the uneconomic loans made to insolvent Japanese borrowers in the 1990s. Central banking, having lost its way, is in crisis. Can the world economy be far behind?
Read more at https://www.project-syndicate.org/commentary/central-banks-negative-interest-rates-by-stephen-s–roach-2016-02#uJFKq5rWuV5DbgmK.99
February 27, 2016 at 5:18 pm |
Frank C..–Roach hasalways been a repsected resource and opinion.This is a grea piece and sums it up well.He is a deep thinker and a great critic of wall street as well.When Tom Keened has him on it is enlightening but when CNBC trots him out it is sad for they only want to know if it means markets up or down—thanks for sending to all the readers
February 19, 2016 at 1:09 pm |
Japanese exports to China fell 18%, sure is a great thing China isn’t a major trading partner!
February 21, 2016 at 8:51 pm |
I’m still not comprehending how China escapes (avoids/resists/promotes?) a falling Yuan but then again I’m no Einstein by a long shot.
“Seven out of 12 economists see the debt-to-gross-domestic-product ratio increasing through at least 2019, with four expecting a peak in 2020 or later, according to a Bloomberg News survey. Debt will peak at 283 percent of GDP, according to the median estimate of eight economists.
Concerns over China’s borrowing came to the fore last week, when a report showed the country’s banks extended a record 2.51 trillion yuan ($385 billion) of new loans in January. The increase in debt could pressure the country’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high.”
February 22, 2016 at 7:53 am |
If it was for inflation, Janet can´t provide shelter. Core CPI is on a sharp move up. Interesting take: http://macro-man.blogspot.de/2016/02/slippery-slopes.html
February 22, 2016 at 2:21 pm |
I dunno, “MM” in the comments section provided a link to an article I suspect is manipulative propaganda….?
“Macro Man: Presented without comment: The Sovereign Wealth Fund Institute on SWF activity in equities
February 24, 2016 at 8:55 am |
I guess I missed Yellen’s shelter moment, y-day FED lackey monetary guru’s were out in public again airing dirty laundry and pumping inflation expectations.