Notes From Underground: For The Sin Of …

Let me wish all those celebrating the Jewish New Year a Healthy and Happy New Year (and I wish the same for those who don’t celebrate the Jewish calendar). Tuesday night begins the Day of Atonement in which the individual is obligated to acknowledge any shortcomings, ask GOD for forgiveness and announce the desire to rise to a higher level in the coming year. There is a list of 44 sins confessed publicly, which covers the entire litany of transgressions the individual/community has most probably engaged in. (I’ve linked a list here.)

My choice for the ECB would be the SIN OF A CONFUSED HEART. Longtime readers of NOTES FROM UNDERGROUND know of my criticism of the central bank’s ongoing QE program. The initial program of preventing the collapse of the EURO caused by a sovereign debt crisis is to be applauded. It is everything that followed the initial thrust of zero interest rates/negative rates and the construction of a massive balance sheet sending sovereign interest rates into negative territory. Currently, yields are negative for a majority of EU states as the ECB asset purchase program has resulted in a dearth of BONDS available for investors.

Negative interest rates have BLED into the corporate sector as investors are pressed to pay any price for the few bonds available due to the bloat of the ECB’s balance sheet. It appears that the Draghi regime has pushed the boundaries of  monetary policy with the BEST OF INTENTIONS but critics are on the rise as the new ECB President Christine Lagarde is set to begin her reign as the guardian of the EURO and the EU financial system.

Last week executive board member — and German Bundesbaker with a record of hard money policy — Sabine Lautenschlaeger resigned. On Friday, a group of former European Central Bankers published a memo attacking the Draghi policy of ultra-loose money fomented by President Draghi. The signatories to the letter were known for being monetary HAWKS but they are a collective group of the most prominent economists and bankers in the EU. The critics warned: “From an economic point of view, the ECB has already entered the territory of monetary financing of government spending, which is strictly prohibited by the MAASTRICHT Treaty.”

This is a very serious issue for this was what the German High Court in Karlsruhe was challenged to adjudicate with the commencement of ECB QE policy. The continuation of QE and negative rates is being challenged as a corrupting force of politics in the EU. Again the best intentions are often not enough to overcome a confused policy. The confusion results in the financial repression of savers while rewarding those who have accumulated too much irresponsible DEBT.

In a follow-up to the letter from the giants of EU banking, the editorial board of the Financial Times issued a rebuke titled, “The Euro’s Guardians Face A Roar of the Dinosaurs.” The language is meant to be incendiary as it wishes the theories of the old be washed away by the needs of the younger generations. The FT has the temerity to admit “it makes more sense as a camouflaged fight for the interest of savers against those of borrowers.”

Rick Santelli and I have had this discussion for several years. The ECB has been in the vanguard of FINANCIAL REPRESSION. The result has been that the SOVEREIGN DEBTORS OF THE EU HAVE BEEN BORROWING AT RAPACIOUS RATES. All on the implicit guarantee of the German credit card, which the FT editorial fails to mention.

AGAIN, THE QUESTION FOR THE GLOBAL MACRO WORLD AND GERMANY: IS THE IMPLICIT GERMAN GUARANTEE OF THE ECB BALANCE SHEET AN ACT OF FISCAL STIMULUS? IF THE GERMAN PEOPLE WERE FORCED TO BE TAXED TO BAIL-OUT THE ECB WOULD THAT BE CONSIDERED A FISCAL STIMULUS?

There’s much more discussion to follow with great concerns for the global financial system, but be assured this analysis will not be the result of a CONFUSED HEART.

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12 Responses to “Notes From Underground: For The Sin Of …”

  1. Chuck reeder Says:

    Gut yontif….

  2. bob zimmerman Says:

    Shanah tovah

  3. Bellino Says:

    John Connolly, of “The Rotten Heart of Europe” fame, has stated for the euro to work equitablely for the euro members, Germany would have to transfer 10% of its GDP in perpetuity to other members. If this be so, then the german elite would have to swollow Super Mario’s sneaky attempt to create a eurobond. If all this be correct, then someone will have to light a fire under Lucifer, who in Dante’s Divine Comedy is encased in ice.

    • yraharris Says:

      Bellino–you are correct.Bernard maintains that Germany acting as a transfer agent for the EU would have to transfer at least 7% of its GDP every year to the debt plagued nations—–Bernard notes that this transfer is larger on a percentage basis then the reparations under the Versaille Treaty.This is what Otmar Issing maintained in an FT oped a few years back was “Taxation Without Representation.”In today’s the headline is that Draghi ignored ECB in-house advice on restarting QE—-Mario had to go out of office with a last ditch power play in which he used a theoretical construct to further the adulation of the Davos/FT cheering section.

  4. Pierre C Says:

    The ECB are their own worst enemy.

    I would like to run a theory by you from Keith Weiner at Monetary Metals. I have mentioned them in the past. One can earn interest IN gold and silver On gold and sliver. I’m not promoting them, just think this is pretty genius..for now.
    Anyways, I will not copy paste, but try to put this in my own words. Don’t laugh me off this blog, please.
    Inflation vs deflation
    As interest rates are being suppressed, this promotes businesses to borrow more and make more “stuff”, this extra supply coming into the market will cause a deflationary effect in the price of goods. IE: if a business can borrow at 2% to build hamburger stands selling burgers making 10%, equals a lot more hamburgers. “deflation”

    At the same time investors looking for a return because there is no yield in bonds are forced into assets like stocks and real estate to make money equals “inflation”.

    The irony in all this came up the other day while I was watching Jerome Powell in a town hall meeting.The overwhelming complaint from the participants was the lack of affordable housing was creating employees that were not “stable”. The jobs are there, the training is available.
    Powell must have been thinking: “Hmm how do I get wage inflation in this environment?”
    Happy New Year and thanks for putting up with me!

    • yraharris Says:

      Pierre—the analysis is high quality.The zombie businesses supported by the record low interest rates keep businesses afloat that can sustain themselves by trying to push more and more out the door at no profits—-this is very much the Schumpeterian notion of pushing on a string—-there is no creative destruction .The fear of deflation is the demon that is the operative basis to the Bernanke policy book—thus we wind up caught in a web of LIQUIDITY VERSUS SOLVENCY and how to know the difference.The issue for Gold and Silver is based on the central banks fear of deflation and it is an assymetrical fear.Bernanke in Jackson Hole 2010 called his plan the Portfolio Balance Channel which was forcing investors to take on a high risk profile to unleash the animal spirits to kickstart the economy—owners of assets we rewarded while savers were punished–all by design

    • Chicken Says:

      I’m not following exactly how gold or silver pay interest but if the yield curve is flat this means the yield spread is thin to non-existent, perhaps negative. So “savers” are motivated to seek alternatives, perhaps risky ones as Yra points out.

      Looks to me they’re being front-run to death?

      • Pierre Chapuis Says:

        The gold and silver is leased out to companies or banks that use gold and silver. My gold or silver serves as collateral until they sell their products. 1 year leases are usually the norm. The bank or company that leased my metals know exactly how much they will owe me. They don’t have to worry about the prices fluctuating. I hope this clears it up.

  5. Daniel Says:

    Great analysis Yra, as always.
    Love your stuff with Rick Santelli and financialrespressionauthority.

    Question
    How does it all end? What eventually breaks these crazy policies and kills the global financial system? Are we looking at something potentially far worse than 2008?

    Thanks.

    • yraharris Says:

      Daniel—thanks.I think the issues in the bond markets are going to cause pain across the global financial system.The financial press and sell side has applauded the central bank actions for many years as the continued repression of savers and lenders have bailed out many actors.The question you are asking and the one NOTES has considered for many years is when does the great experiment in monetary policy come to an end and what will the cost be—-markets always exact a price for ill-conceived policies,without concern for whatever counterfactuals are deemed to be the critical rationale—-I believe Keynes was correct in asserting that markets can remain irrational far longer then investors can remain solvent—impossible to time but being attuned and attentive is the key to this BLOG.

  6. Daniel Says:

    When is impossible to answer Yra. I suspect the great experiment in monetary policy will never end. ‘Whatever it takes’ remember. The question is when does it not work anymore or when does the market not take it anymore and the central banks finally loose credibility. We just don’t know. It is interesting that the BIS recently stated that more QE is doing more harm than good to the global financial system while the FED has to reboot QE to save REPO or the global financial system collapses. When cure and the disease become the same we cannot be that far away from the ‘when’.

    But what happens when we are there? Markets are masters at clearing excesses. They do it when you don’t see it coming and tear apart every long position. And whether it is stocks, bonds or real estate, pretty much everything is a derivative of debt. And I suppose we can all agree that there is a lot of excess debt. Can it be that we are looking at a potential meltdown?

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