Thoughts on Euro-Plan G

Draghi Says Officials Agree on ECB Unlimited Bond-Buying – Bloomberg.

The latest plan that will save everything uses the euphemism for  Outright Monetary Program. See, by using the word “monetary” you make it really a plan to transmit monetary policy rather than the financing of governments prohibited by the ECB’s charter in Article 123.  The dishonesty does not stop there.

Central planning is running amok in the Eurozone:

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.

Interest rates have diverged in Europe because the risk of lending within each country has diverged. Draghi says that the program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.” One man’s severe distortions are another man’s market forces.

Spain is in the midst of a severe economic depression, and Italy is in a recession. Due to these economic conditions, loans to companies within their borders are more risky and deserve a higher interest rate. When a central bank artificially lowers the interest rate by fiat, it does not lead to more lending as we have learned since 2008 (and since 1994 in Japan).

Banks are not getting compensated for the risk that they are undertaking due to the controlled rate, so they choose not to lend to the private sector; however, they have no problem using their capital to buy sovereign debt in this rigged game. With the Draghi put, there is virtually no risk in carrying short-term Spanish or Italian bonds.

This program will not solve the problems of an ill-fitting currency union; it will merely keep it afloat longer. Banks will continue to purchase sovereign bonds and will actually decrease their lending to the private sector to do so. One of the unintended consequences to this program will be reduced economic growth in the PIIGS.

Another problem with this plan is the seniority issues. For some reason, the mainstream media glides over this issue. Recall that when Greece needed a bailout, the ECB was not involved in the write-down. Nothing in the bond covenants, the ECB charter or any other European rule or regulation gave the ECB senior status.

Yet, there it was getting 100% of its money when the bailout was crammed down on the private sector. Now, the ECB is saying, “Don’t worry. We won’t act illegally again,” and this claim is merely repeated without any scrutiny in articles I read in the NYT, WSJ, Reuters and Bloomberg.

Why is the ECB being treated with kid gloves when it is in the midst of such a blatant power grab? The new program requires countries to apply for an official bailout with “conditions.”

Ask Greece about what conditions mean. Spain and Italy will be forced to sign memorandums of understanding pledging to enact certain reforms; I add that these reforms would never fly in Germany’s over-regulated economy.

These countries will also be subject to periodic inspections. The ECB board will be able to cut off funding if it feels that the conditions are not being honored. Applying for a bailout will be tantamount to a regime change. The people may stand for budget cutbacks, but I do not think that they wish to be humiliated at the hands of their so-called allies.

This plan must be placed in the context of the ongoing Eurozone recession. Once again, the mainstream media falls flat on its face and repeats the rosy forecasts of the ECB, which calls for economic growth next year while conditions continue to worsen.

Economic red flags are no longer confined to the PIIGS; the northern core countries have witnessed steadily deteriorating economic conditions and look poised to enter a recession. Remember, the PIIGS are Germany’s largest trading partners, and they are importing less due to the depression/recession.

No matter how the Eurocrisis is spun, the economic fundamentals point to a continuing malaise. Two years ago, serious reform combined with some short-term assistance by the ECB could have prevented the endgame. Now, I believe that a Eurozone breakup is inevitable, but the timing is indefinite.

 

 

 

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One thought on “Thoughts on Euro-Plan G

  1. Some clarification is needed. When you say “a central bank artificially lowers the interest rate by fiat,” are you suggesting these institutions somehow have power to dictate to credit markets many times larger their size? My sense is if a central bank goes too far with its attempted manipulation, markets can push back on the central bank, and this quite easily. Central banks most certainly are not at luxury to do by fiat whatever they wish, so their “control” over interest rates in fact is limited.

    Suggesting that banks “have no problem using their capital to buy sovereign debt in this rigged game” likewise is assuming they have some other choice. There simply are not enough highly rated private sector credits to whom to lend in such capacity as can mask the present insolvency of these banks–a condition brought about through their own self-induced, heavy dose of zero due diligence exercised over several decades whose consequence gutted the private sector using fraudulently rated credit securities leveraged and capitalized by stripping the private sector’s most prized physical assets, the likes of which had been accumulated over decades. The private sector today now is a skeleton of its former self, this as a result of past malfeasance on the part of financiers most emphatically, and so offers no refuge for banks whose criminal zero due diligence regime, indeed, has thoroughly crippled the private sector. You wanna know why corporations are holding record amounts of cash on their balance sheets? They know their enemy and they understand its game.

    Europe is trapped in a negative feedback loop, as is the U.K. and the U.S., as well, and this is not the making of “central planning.” Rather it was preordained in a zero due diligence regime leading to all manner of free market frauds being hoisted upon the banking system, and this with the very blessing of central banks. There was in fact no resistance from these so-called “central planners.” Endlessly did Greenspan appear before Congress to rationalize the banking system’s zero due diligence regime. Bernanke and Geithner likewise conduct policy as though that long-running, fraud-rife, short-sighted, counterproductive arrangement somehow might be restored. These twp men are nothing but shills for thieves whose manner of conduct even to this day will do nothing but leave the physical and financial economy in an evermore precarious state. Truth is this is intended, and has been all along.

    There are just two ways forward now and no middle ground: debt destruction or accelerated hyperinflation. The latter is the mechanism the ECB, the Fed, the BoE, the BoJ in partnership with now hopelessly trapped (and insolvent) TBTF banks — a condition all these parties are principally responsible for creating in the first place — have chosen to take. I would argue the private sector’s physical ruin recklessly imposed for several decades by what in fact is a covertly hyperinflationary policy is being but furthered by what is now only a more overtly hyperinflationary policy.

    Hyperinflation’s most insidious effect is to accelerate the rate at which physical assets are made available on the cheap, this by assuring “excess capacity” increasingly avails itself to those financial enterprises whose lifeblood depends on stripping assets to generate cash flows necessary to sustain ever increasing leverage. At present we are on the verge of entering into a most chaotic manifestation of this dynamic, whose symptoms will create conditions like those prevailing in 1923 Wiemar Germany.

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