Run For the Hills: ECB Will Debut at the Monetizing-the-Debt Party

Friday, May 08, 2009

A spontaneous warning first: Don't fall for the calming words from the Eurozone's central bankers while they place orders for a fleet of monetary helicopters that will shower freshly created fiat money across the European monetary union.
On Thursday the European Central Bank (ECB) dropped a bombshell with a move that is designed to accelerate the destructive devaluation of the Euro currency. ECB president Jean-Claude Trichet announced that the ECB will begin to copycat the disastrous policy of the Federal Reserve:
The Governing Council has decided in principle that the Eurosystem will purchase euro-denominated covered bonds issued in the euro area.
In plain language this means that the ECB will purchase mortgage backed securities at mark-to-model prices in order to "adjust" the value of banks' portfolios, a telltale sign that the Eurozone's money printers expect the property slump to turn into a freefall soon. 
The terse statement is a polished version of a watershed decision that signals a deep rift in the Euro members' policy approaches. German Bundesbank president Axel Weber had heftily campaigned against such a move as it means nothing else than the willingness of the ECB to monetize the debt. Throw your shoes at me at the end of 2010 if the ECB has not begun to purchase Eurozone government bonds by then.
The ECB's introductory statement had no more details, saying only that more information would be given at the next rate setting council meeting on June 4.
Pfandbrief Casino
Welcome to the Pfandbrief (Eurozone MBS) casino in the coming four weeks where market players will place their bets before the ECB starts buying.
Bloomberg filled in, obviously from the Q&A session I was not able to watch:
President Trichet today announced the ECB will buy 60 billion euros ($80 billion) of covered bonds, taking markets by surprise after Bundesbank chief Axel Weber had campaigned against such a policy.
Weber said on April 15 that "direct interventions, such as the purchase of corporate debt, shouldn’t take priority." He pushed instead for the ECB to lengthen the maximum maturities on its loans to banks to 12 months from six months, a measure the central bank also announced (on Thursday.)

On first sight €60 billion may appear as not more than drop in the bucket of the ECB's balance sheet that had a volume of €1.8 trillion as of May 1
All the "special" liquidity providing monetary operations of the ECB - gentleman's language for the act of printing money with no corresponding value - have a breathtaking volume of €419 billion on top of the regular repos which stood at €233 billion at last count.
But this first toehold of a new virtual money press is a clear sign that inofficially bankrupt Euro members have won against ueberhawk Axel Weber.
But it must not be dismissed either that the ECB has already bought crap paper covertly in the last 22 months, hiding it in their trash can called "other assets" on the left side of its balance sheet. It will be a pyrrhic victory though as the Federal Reserve example has been showing in the recent past and which can be used to derive a relatively certain forecast of more money creation to come.
Remember that all these "special" refinancing operations have come in the form a dripfeed of several billions of funny fiat money month after month since August 2007. All the time these monetary inflation measures have been accompanied by calming Jack-in-the-box-like central bankers that plainly lied when saying the crisis would be contained with such manoeuvres. Thursday's rush of new "creative" measures to save the disintegrating fiat money system leaves no room for a denial of my accusations. What central bankers call "creative" can be translated into "quantitative easing", another euphemism for the act of creating more unbacked fiat money.
New Record Low Repo Rate
As I am so enraged that the ECB has ripped away the monetary floodgates, the decision to cut the leading refinancing interest rate another 25 basis points to the historical record low of 1% comes only second in terms of importance this time. (Ok, ok, I eat my words from this post.) This is only symbolical as we have reached the area of economic marginality since cutting this rate below 2% last year.
The move to cut the marginal lending facility - Eurozone equivalent to the Fed's discount window - by 50 basis points to 1.75% is the next indicator that the ECB remains in crisis mode and banks are still scrambling to fulfill reserve requirements.
The ECB missed out on effectively forcing banks to lend again by keeping its deposit facility at 0.25%. A flat zero could have increased the chance that banks get back into their core business of lending again.
EIB Enters the Ring to Liquefy Credit Markets 
With commercial banks shaking their heads to nearly all credit requests from corporations and individuals Europe's monetary leaders have sent another player into the ring. According to a third release of the ECB the European Investment Bank (EIB) will become another eligible counterparty in the Eurosystem’s monetary policy operations on 8 July 2009, potentially creating up to €40 billion in additional investment value.
€270 Billion In the Tunnel and Still No Light In Sight
To add another dimension to the Eurozone's gigantic problems, read (Austrian) ECB board member Gertrude Tumpel-Gugerell's speech from May 6 (German language only.) She arrived at a figure of €270 billion for all cumulative creditwritedowns at Eurozone banks since the beginning of the crisis in August 2007.
Her speech confirms that the Eurozone monetary system balance has grown by €600 billion since then, pushing the ratio in comparison to Eurozone GDP from 10% to 16% within less than two years.
Recent riots in France, Greece, Ireland and England are a signal that Eurozone inhabitants already express their displeasure with this disastrous monetary policy, albeit probably only involuntarily. Some days ago I read that US president Barack Obama told bankers that he was the only one standing between them and the pitchforks. Europe's bankers have a comparably easier position as 99% of Europeans  have more or less no idea about the interaction of monetary policy and their own economic situation. But my anecdotal evidence shows that they begin to develop a gut feeling that we may be the world's backwater at the end of this crisis. Instead of G20 meetings world politics may be determined by the newly formed G2; that is resource rich Russia and the Chinese dragon, both of them eager to end the arrogance of the Western world as we know it.
A change of mind at the end of this post. Don't run for the hills but hold your political representatives  accountable for the mess they have brought upon us stemming from a lack of economic comprehension that may potentially be the rope leading us into the abyss of a total economic collapse.


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