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.
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.