dragold

Mario Draghi needs to make his peashooter look like a Howitzer. It just isn’t possible

CPI inflation roared ahead in China and alongside that, output fell for the 14th month in a row. So the Shanghai dropped over 2% (without PBOC buying it would’ve been closer to 5%), and the index continued its jerky slide down to 2500:

Shang10316

There’s nothing new in this, but it looks more interesting today in the context of the ‘choices’ facing ECB Chairman Mario Draghi. As we now live in a neoliberal world, the choice is between the pointless, the negative, and the foolhardy.

What the PBOC has proved pretty conclusively since last September is that it’s very easy to spend your entire inheritance on creating good looks, and still look awful. If you thought QE was iffy plastic surgery, direct share purchasing is fullon badly botched botox by comparison.

The pointless option open to Dragula is yet more QE. I’m told even he now accepts this isn’t going to have any effect, but he will continue with QE anyway, as sounding doubtful about it would cause a selling panic and drop the euro by six points. As the US and Japan found, heroin is great at first, but then you need it to feel normal. Once detox is necessary, there is only cold turkey and diarrorhea.

The negative would be to plunge the pendulum further down the conversion of Zirp into Nirp pit. This is the expectation now, so as with so many of these ‘policy’ statements, Dragnet must do this at least. I posted last weekend about why this is a terrible idea, and that more or less guaranteed it being adopted.

The foolhardy but entirely sensible approach would be to tell Schäuble, the Bundesbank, Drizzlebang’s f**kwitted eurogrope and all the other austeritistas to grow up and accept the need for a change in strategy. While I do think that very unlikely indeed (for political, not economic, reasons) I did learn yesterday that Draghi is likely to drop in a reference along the lines of “we must look to sovereign governments for new ideas about economic stimulation, the monetary toolbag being empty” – albeit not quite that bluntly…..although that would be accurate: the only monetary solution left open to Signora Dragqueen is to bring down all the Monets lining the ECB corridors, and flog them off.

Meanwhile, darker theories abound, as always. I posted over two years ago about an open-secret plan within the ECB to back ClubMed bonds (which back then had more spikes than the Buck Palace railings) with gold. It was rejected in favour of more underhand ledger-click tactics: but although the ECB has nowhere near enough gold to do such a thing, that’s never held the Chairman back before.

I’m grateful therefore to Slogger Lawrence for pointing me at this archive piece from 2014 by Jaco Schipper relating to the ECB’s ownership of gold. Schipper’s bottom line is that depending on the ‘allocation’ measure, Draghi can do more or less what he likes with it….no change there, then.

This is what Schipper concluded at the time was the only real means of ‘restructuring away’ public debt:

‘For a restructuring to work, gold reserves must be revalued and used to retire public debt. This way, you recapitalize the financial system that rests on government debt that currently operates as its risk free asset’.

Two years on, of course, this is the current theory of the day, and one I have held to throughout that time, viz the central banks have been persistently manipulating the gold price downwards and buying as much as they can when they can.Thus, while the ‘value’ of gold has fallen three years in a row, CB purchases at the end of 2015 were well up on 2014: November vs December alone saw a 90% increase led by China and Russia.

Four things most observers can agree upon: requests for sovereign gold repatriation have been stepped up, central banks have been consistently understating the real level of their gold reserves, former creditor nations are accelerating their stockpiling of it, and oil geopolitics are broadening the existence of debtor nations.

But as the rest of the loopy economic model keeps on unravelling to raise the gold price in between times – and the priorities keep changing – many CBs are now some way behind the curve.

If he wants to be on the gold revaluation bandwagon, then Draghi really does need to say something in just over an hour’s time that eases the price of it….and unfortunately for him, he’s likely to be firing blanks.

Still, no pressure Mario: in your own time, dear.

Last night at The Slog: the long-term inadequacies of George Osborne