CRASH2: How Tricky Trichet and Devious Draghi transformed a slow horse into a dead donkey

draghitrichet

Reasons 57-75 for Brexit….

IN THIS THE FINAL ESSAY IN THE SERIES, THE SLOG ANALYSES HOW & WHY THE EUROZONE’S MONETARIST CENTRAL BANKING POLICIES HAVE DESTROYED FAITH IN THE SAME WAY AS JAPAN, THE US & CHINA

This being Friday, it’s not uncommon for a degree of demob-happy Bullish market trading to reappear after a bloody week. But whatever happens today, the confidence in the mechanics, tools and goals of contemporary econo-fiscal theory has gone in 2016. Today I look at why Europe has more problems than most.

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The New Yorker magazine’s wit and sound intelligence has always been something to which I look forward avidly. During September 2011, its Finance Page wrote:

‘In July, 2008, on the eve of the biggest financial crisis in memory, the European Central Bank did something both predictable and stupid: it raised interest rates. The move was predictable because the E.C.B.’s president, Jean-Claude Trichet, was an inflation hawk; he worried about rising oil and food prices and saw a rate hike as a way of tamping them down….that July rate hike was like kicking the economy when it was down…’

You could insert ‘December 2015’ and ‘Janet Yellen’ into that piece, and run it later this year.

I differ from its observations in only one detail: it wasn’t that Trichet was just an inflation hawk: he was a monetarist. And like most of the Eunatics, he remains a single-currency monetarist. This – along with two other factors – is what has turned the Eurozone into a special kind of basket case.

Another monetarist was Nigel Lawson, a man who never forgot the devastating cost of joining the EM mechanism, being shafted by George Soros….and then changing his view abruptly on whether it would be a good idea to be tied to Berlin. Therein lies the next biggest of Europe’s threefold unique lunacy: the fact that Wolfgang Schäuble is still living, inside his disturbed head, during the Weimar hyperinflation of 1923.

And third, there is an Italian ex-Goldman card sharp called Mario Draghi with whom neither the Bundesbank nor Schäuble get on: he is for QE and they are for austerity. It’s not quite that simple, but as Sun headlines go it’s more accurate than most.

So the euro was always going to be a horse that went into the péage bearing three lead weights. And along the way, blunders derived from arrogant, dated and monetary control freakism didn’t help.

But things didn’t start like that. Starting with a relatively loose credit policy from 2001-3 -and then accelerating from 2004-7 – even Trichet’s ECB later admitted that liquidity was building up in the ezone when there didn’t seem much of an economic rationale for it. The ECB’s Monthly Bulletin  for July 2007 noted that the excess of liquidity in the eurozone had got out of control after 2004. The emphases below are mine:

‘The exceptionally low level of interest rates and latterly the strengthening of economic activity has led both to a renewed demand for money for transactions purposes and to an increased appetite to borrow to finance spending and investment. [This]  took place in a context of declining growth in loans to households and non-financial corporations

This is a somewhat apologist and devious way of saying that Banks and Sovereigns were being given massive loans, but those tasked with the consuming and manufacturing were not. It represents a classic symptom of the monetarist’s disconnect with real business and ordinary people. Realising the mistake too late, Trichet panicked in 2007 and raised interest rates. It was precisely the wrong thing to do as, in the UK and US, intrabank nerves and high leverages in the financial sector hove into view.

His successor Mario Draghi has proved equally distant from consumers, sharp-end economics and even bourses. As sovereign debt in ClubMed ballooned out of control, Draghi casually (and illegally) subordinated holders of Greek debt, and fleeced largely innocent depositors on the equally troubled island of Cyprus. Before this, however, he devoted much time to Machiavellian politics aimed primarily at purging the German 1923 tendency from the ECB’s Board.

Asking a former Goldman colleague of the Italian what we might expect from Mario’s appointment, I was told “He will run rings round the Bundesbank”. This proved to be on the money, but it built up a large lake of resentment behind the Berlin dam. (With equal insensitivity, he placed a pre-QE call to the Swiss central bank, ordering them to remove the cap on the Swiss Franc. This too will never be forgotten).

Perhaps most  perniciously, during a secret EU FinMin session during 2013, Draghi presented two hours of charts to the Chancellors of Europe, in which he made brutally clear that wage costs must be driven down, or the eurozone would become irreversibly uncompetitive. Again, this emotionally divorced Friedmanite view of the world seemed to pay little attention to the question of who would do the consuming to drive the recovery, if their real pdi was to be diluted.

Later of course, it reduced European demand for Asian goods as well (cheap or not, if you’re broke, you can’t buy stuff….especially when credit is tight) but the gathering dust-storm turned into a spreading conflagration when Schäuble decided to exact extra-Central Bank revenge upon its Chairman. Setting up an informal (and illegal) finance Troika chaired by Dutch anagram Jeroan Dijesslebleom, the German finance minister pushed on towards his goal of subordinating the slower and bankrupt southern eurozone States.

A monetary expansionist QE central policy (answerable to noone) now sits uneasily alongside a pointless austerity programme imposed by a rival organisation…also answerable to noone. It’s not my task here to delve further into the politics behind the current EU shambles: suffice to say that – just like Japan – the eurozone needs to sell debt which is high risk and low yield….against a history of Draghi having destroyed bondholder trust and – in common with the other two Big CBs outside China – promised a great deal, only to be proved comprehensively wrong on almost every dimension. (Some of you may have noticed Portuguese bond yields spiking yesterday: this is almost certainly not a coincidence).

During yesterday’s global stocks drubbing, the greatest hammerings were in Europe and the banking sector. Following on from yesterday’s post, the exact same things apply to market reactions: they lack faith and trust in the Central Bank, and they know that the private banks feel the same way….and are thus nervous.

But the real qualitative leap of doubt since Christmas is increasingly focused on monetarism itself as a capitalist form that can deliver stable and crisis-free societies without recourse to collectivism. Just as we had the Davos Doubtfest about Chinese problems (as the PBOC threw 3trillion Yuan at the markets) followed by the Bloomberg Bluster about global recession, doubtless we’re going to be treated to weeks if not months of denial about where valatilleddee ends and major correction begins.

Only market and other left-field events will decide that timescale, and as I learned the hard way between 2009 and 2013, calling that one is a mug’s game.

At the end of these three essays, my bottom lines remain the same as they’ve been since 2003, viz, we have put off containing the power of financialisation for far too long – now it must be diminished; and by relying on credit-based consumption at one end while driving down production wages at the other, globalised Freidmanite monetarism is – predictably – eating itself.

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26 thoughts on “CRASH2: How Tricky Trichet and Devious Draghi transformed a slow horse into a dead donkey

  1. After centuries of playing the long game the “elite” have got humanity by the throat. They control the means of production, the financial institutions and the military complex. All outside of this “elite” are just inventory items to either produce or consume production. We, humanity, are untermensch to the “elite”.

    In the UK we have the Conservatives proclaiming “work makes you free” (see any utterance from Ian Duncan Smith and his strike force the DWP). The troika are subjugating Greece for no more concrete fiscal reason than “because they can”. The NAFTA agreement shafted the American workforce with jobs haemorrhaging from the USA. Barry O’Ballsup forcing TTP/TTIP upon sovereign nations where Corporations will have supranational power. The Politicians have sold their ability to act on behalf of their population. The “free” Press have long since taken their 40 pieces of silver.

    So the onward march of the “elite” continues ever onward, with them hiding in plain sight.

    “There is none so blind as those that will not see. The most deluded people are those who choose to ignore what they already know”.

    Jonathan Swift.

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  2. Canexpat that article is enlightening.

    If what the author says is correct and can be attributable to Marx, then I must go and read Marx works.

    Thanks.

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  3. And why is Schäuble so quiet these days? And Merkel too come to that…Turkey threatening to ‘unleash’ a million more migrants into the EU…Wonder what Recep Erdoğan is asking for in return for not sending all the refugees into the EU?

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  4. Armed with iron bars… and all because Britain can’t house its own population, leave alone the floods of refugees threatened by Soros – sorry, that was a typo – that should have read ‘Turkey’.

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  5. I just wonder if anybody here can actually explain why they are coming to Europe. I don’t mean the current symptomatic explanation. But what is the underlying & historical cause?

    I don’t hold out much hope of an honest answer.

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  6. thank you JW for a truthful financial recent history. MSM financial press would never dare tell it how it is. they can only lie or as they call it ‘spin’.

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  7. I’ve heard that Yankaroufakis is stepping into the European arena proper soon.
    I continue to think of him as an economic hit-man, whose new MO is to offer you a distraction while the real job is being done.
    DiEM dot org.
    Democracy in Europe Movement? The “D-word” should give the game away.
    The best he can say is that his offering is a means of addressing the problem, by evolution.
    If it works it will work by a process of evolution, failing and succeeding along the way. Aka distraction.
    Then there is his new book
    “Europe’s Crisis and America’s Economic Future”.
    /Shakes Head

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  8. Billy: Because our elite want asked them to. Count Coudenhouve-Kalergi, one of the people who contributed to the idea of an EU, writing in the 20s stated he thought the Europeans should be replaced with a subservient mixed mass similar to the Egyptians. With a certain tribe ruling over them. The EU bestows a Kalergi prize every year. Merkel is one of the recipients.

    The other historic cause is muslims still think the Balkans, Italy, the Iberian peninsula and France from Marseille to Tours are muslim clay because there’s a no-taps-back clause in the koran.

    The other other historic cause is 60 years of improved nutrition and healthcare have exploded the population in Africa and the ME, and they are still grinding out the babies like they had 50% infant mortality. They are doing exactly what the Europeans did between the 15th and 19th centuries, exporting their excess population rather than internally restructure.

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  9. I saw an ad in a medical journal back in the 70s “whatever the diagnosis Valium!” it seems that whatever ails our financial system the cure is always that we must make the richest just a little richer, and then everything will be ok.

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  10. Not more Count Coudenhouve-Kalergi plan crap.

    Please print the plan on here, now today, or links to it in full (and I don’t mean rumours and hints from the main Italian article which started this shit ball rolling).

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  11. Canexpat, what we’ve had over the last decade(s?) is not capitalism – if it was, a number of other banks (GS being one) would have gone under. It’s crony capitalism gone mad.

    John, a great article.
    DavidC

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  12. Why are they coming to Europe? A number of often mentioned reasons spring to mind. The logical route might be to gravitate to other arab/muslim nations but both Turkey and Jordan are already replete and it seems none of their other brother states want them. Then there are the free benefits on offer in the West today which the West seems so curiously anxious to provide. But from extensive reading on the issue, the notion of an impetus to establish a worldwide Caliphate, mandated in the Koran seems plausible when observing their current spread worldwide, from Iceland to Chile in already established enclaves plus the rhetoric coming from their more outspoken brothers. The totality seems to fit well with the UN aim to dilute nationhood and a sense of identity. As for proof, it would be too time-consuming to list the myriad of sources available to anyone who searches for it and no doubt having final conclusive proof will be too late to do anything about it.

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  13. Alexi,

    Just list one single piece of proof that the UN aims to dilute nationhood.

    Or one single item of proof that the exodus from war in Syria is to establish a worldwide caliphate.

    You don’t have to knock yourself out, quoting chapter and verse, just a single reason for either of your ludicrous claims will suffice.

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  14. Carfull mate, you’ll be on to “Dark Matter” next! Stop when you get to Gravity & Buttered toast” though, Einstein never went near that one.

    Liking the style.

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  15. @Stevie – some answers
    Dr Brock Chisholm, Director General of the World Health Organisation in a speech to the UN in 1948: “To achieve One World Government, it is necessary to remove from the minds of men their individualism, their loyalty to family traditions, patriotism, national identification and religious dogma” – quoted in an article by Jeffrey Titford MEP in Journal of the Campaign for an Independent Britain.

    The Syrian exodus, though obviously adding to the existing Muslim presence in Europe, is a very recent phenomenon and direct response to events, in contrast to the steady stream of Muslim immigration that started decades earlier, in the mid 70s, mainly as a result of the Arab states blackmailing the West over the oil crisis (read Bat Ye’Or). Here’s a few samples of Islamic goals –

    “Islam makes it incumbent on all adult males, provided they are not disabled and incapacitated, to prepare themselves for the conquest of [other] countries so that the writ of Islam is obeyed in every country in the world. ”
    − Ayatollah Khomeini, Iran’s Supreme Leader from 1979 to 1989,

    “One day, millions of men will leave the Southern Hemisphere to go to the Northern Hemisphere. And they will not go there as friends. Because they will go there to conquer it. And they will conquer it with their sons. The wombs of our women will give us victory.”
    – Houari (Mohamed) Boumedienne, President of Algeria, 1965 – 1978, in a 1974 speech at the UN

    “The whole of Europe will become Islamic. Like the army of the sultan we will conquer Rome.”
    − Former Turkish Prime Minister Necmettin Erbakan, June 2002

    “Islam will return to Europe as a conqueror and victor, after being expelled from it twice – once from the South, from Andalusia, and a second time from the East, when it knocked several times on the door of Athens.”
    Sheikh Yousef Al-Qaradhawi, leading Sunni cleric

    “There are signs that Allah will grant victory to Islam in Europe without swords, without guns, without conquest. we don’t need terrorists, we don’t need homicide bombers. The 50+ million Muslims [in Europe] will turn it into a Muslim continent within a few decades.”
    − Muammar Gaddafi, Supreme Leader of Libya

    “It is a duty incumbent on every Muslim to struggle towards the aim of making every people Muslim and the whole world Islamic, so that the banner of Islam can flutter over the earth and the call of the Muezzin can resound in all the corners of the world: God is greatest [Allahu akbar]!”
    – Hassan al-Banna, founder of the Muslim Brotherhood

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  16. Alexei

    Which part of the word “proof” did you not understand.

    The words of a WHO director (from nigh on 70 years ago) quoted by a swivel eyed UKIP fruit loop is not PROOF for a UN aim to dilute nationhood.

    Providing a number of quotes from a number of Muslim clerics (not Ghaddafi – he was a dictator) sermonising about their religious belief is not PROOF that the exodus from the war in Syria is to establish a worldwide caliphate. They are merely supporting your hypothesis.

    Have you been a kipper long Alexei?

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  17. To add just a little to that incisive & pertinent observation, if I was seeing the world in that way, I’d be on “Tenterhooks” too.

    I suppose it might be for money, or some perceived concept of safety based entirely on a projection of the supposed shared Social Ethos of a “United in diversity” EU. Funny how the grass always looks greener?

    I go for the view that it’s simpler than that.
    a/ They don’t wish to die.
    b/ They see no way to change or stabilise the regime in their own lands.
    c/ It’s best to be in the closest place where the deadly stuff is coming from. (The control of death, being the seat of all power in armed conflict)

    I’m not saying there might not be some very miner truths in your assessment Alexi, but I for one would not decide to go for a 2000 km walk through hostile & war torn lands, with my life savings, family & what few treasured belongings I could carry, risk my life in an open sea crossing, only to end up with the cloths I stand-up in & mobile phone if I’m lucky.

    I suspect over 99% of those that arrive here in Europe have used the same pragmatic logic I have. Try using your minds eye as a mirror.

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  18. @Stevie and BG

    +1000

    Occam’s razor on this one I think.

    Instead of identifying the Neocon/Zionist/M.I.C. factions in NATO and the medieval Gulf despots they support as the depraved culprits who have deliberately turned stable and mainly secular states like Libya and Syria into uninhabitable hell-holes terrorised by Wahabbist nutters, lets pour the blame on the poor buggers who do the rational thing and get out.

    I am not for a nanosecond denying that widescale immigration from the Middle East has not wrought awful consequences for the people of Europe, but let’s not forget where the responsibility lies. As with almost everything our psychopathic power elite creates, they walk away untouched, (and usually significantly richer or more powerful), while the ordinary person suffers.

    I suspect it is much easier to blame the outside foreigner than it is to resist the deluge of MSM propaganda designed to deflect culpability from those treasonous few who direct our foreign policy for their own ends.

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