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Germany Says Draghi Is A New Bismark And Dangerous

Interest-Rates / ECB Interest Rates Jun 09, 2014 - 10:35 AM GMT

By: Andrew_McKillop


Mario Draghi's Historic Decision
By pushing down the ECB's overnight rate on forced deposits to it, from the Eurozone's private banks to minus 0.1% per year, and holding the ECB's key lending rate to banks and financial establishments in the Eurozone at 0.15% per year, Draghi made a so-called historic decision. Announcing the moves last week, Draghi used several powerful images and allusions. For example Japan's lost decade, but he means 3 lost decades – and staying with Japan, he could have mentioned that BOJ lending rates in Japan have been held below 2% for 30 years. Did that stimulate the Japanese economy?

Answer the question, Mr Draghi.

Draghi also did not allude or refer to the US Fed. What has been the impact on the US economy of its ultra-low interest rate policy since 2008?

Why would things be any different in Europe?

Much more important, in fact, is the political reaction to taxing deposits to the ECB and holding interest rates on loans from the ECB at ultra-derisory low levels. With little surprise, the reaction has been sharpest and fastest in Germany, where everybody knows about the hyperinflation bomb of 1922-23, the Rentenmark fiasco which followed, and the almost-inevitable rise of Nazism and its Keynesian economic miracle, planned by Hjalmar Schacht (also spelled Schlecht). This central banker decided his Keynesian mumbo jumbo plan only months after Keynes published his “General Theory” in 1936. After that, there was no going back for Germany.

Following Draghi's supposed historic decision last week, 'Der Spiegel' wrote that it was the “end of capitalism”. 'Die Welt' compared Draghi with Bismarck and said Draghi is a “near autocrat” who is beyond control. Ralph Brinkhaus, the financial spokesman in the Bundestag for Merkel’s CDU called it a “historic gamble”. Brinkhaus joined German banks, insurers and pension funds saying that Draghi and his colleagues at the ECB are debasing the euro-currency, expropriating German savers and are probably “exceeding the limits of its (ECB) mandate”.

Teflon Finance and Banking
To be sure, Draghi with his Goldman Sachs background thinks he is Teflon coated and untouchable. When or if things go bad with his latest gimmick or gambit, as they so easily can, he can blame bad weather, consumer refusal to spend, the private bankers, their governments, the Eurozone economic situation before he arrived, the overvalued euro - - and why should I write his speeches for him?

The merited criticism of his latest central banker gimmick, in Germany, could appear extreme to some, even bordering on hysteria, but Germans have logical and historically-proven reasons to fear these gimmicks that “surprisingly” go bad.  With no surprise, the anti-Europe political parties were strongest in their criticism. 'Alternative for Germany' or AfD, which scored 7% of all votes in Germany's recent European elections – in France its ruling Parti Socialiste scored 6.5% of the votes of all registered voters – tore into the Draghi decision. Several party spokespersons called it a sabotage attempt on German retirees and savers planning their retirement, a savage attack on the life insurance industry, an autocratic attempt to keep the euro money and the Eurozone staggering forward, and “expropriation” of the life and work of all average German people.

This is an especially emotive loaded term, in Germany. Hitler's central banker, Schacht, previous to the rise of the Nazi party to total power, had been a key figure in creating the Rentenmark, at the end of 1923, for Weimar Germany – which was purely and simply based on mortgaging all real estate, of all kinds, using this as the collateral to issue Rentenmarks. Showing his central banker mettle, Schacht was also a leading figure in the almost simultaneous creation and issue of the Reichsmark, but this money creation was indexed on a “basket of collateral” including German coal, iron ore and gold. Both New Marks ran together and usually at par or 1-for-1.

The main problem was ultra-simple, and is still ultra-simple today. All real estate prices had to rise, as more Remtenmarks were issued. Of course similarly, so did coal and iron prices. Gold, in the 1920s and 1930s, was arguably at least as price-fixed and market manipulated as today and almost exclusively concerned the Reichsmarks.

When the collateral's value growth stagnates, or even worse when its value declines, it is the end of the party. Draghi can with no doubt pretend he knows nothing about this.  Being an autocrat, he will ride roughshod over German “historical worries”, and count on general ignorance, apathy and disinterest in other Eurozone countries to scrape along with his dangerous gimmicks – and he will be wrong!

The Euro is a New Mark
Whether he likes it or not (rather not) Draghi knows all about the role of Germany's economy in maintaining the euro overvalued against any other currency. He knows that if Germany “opts out” of the euro that really is the end of the game - for him. Back to New York, economy class.

What he needs to know is that there are uncanny or frightening parallels between the euro, and the Rentenmark, Reichsmark and the never-issued Roggersmark in pre-1945 Germany.

All these New Marks were only possible because Germany had had an extreme and lurid hyperinflation breakout in 1922-23. They were able to be introduced at central banker-friendly, people-unfriendly exchange rates, basically enabling a Clean Start on the back of total ruin for German savers. Their life savings were literally worth nothing at all. Of course they accepted any tiny amount of R-marks for their chaff money paper marks – their life savings. The R-marks, at least Reichsmarks were pegged to the US dollar, an early example of what we call dollarization today.

Possibly strange-seeming to some, today, the earliest issues of R-marks (called Rentenroggermarks) from the end of 1922, during the hyperinflation firestorm, were to city authorities around Germany, who used the collateral of rye, wheat, coal and iron ore - and gold in only a few cases. Other collateral used included sugar, lignite, locomotives, beer and kilowatthours of electricity. Making the process complex and sure to fail, later on, the New Marks were not convertible to their underlying collateral. They were not commodity-indexed. The single goal was to have a stable circulating currency.

Many economic historians argue that the introduction of the R-marks was not a reaction and response to hyperinflation in Germany – but the largest single cause of it.

Another key fact that Draghi certainly knows – and does not want to know – is that the euro money is deflationary. Draghi officially fears deflation and officially wants inflation. His ECB and its (un)Funny Money caused the deflation.

For sure and certain Draghi will deny and reject any comparison between the 15-year euro, and the scary example of the 1923-45 Rentenmark. His economists will say the two political frameworks and economic conditions are absolutely and totally different, but they will have to accept the historical sequence of reality. The New Marks did not tame German hyperinflation, but accelerated it. They were delivered in autocratic style as a a fait accompli. No alternative. Their introduction produced extreme and massive deflation, the exact opposite of the hyperinflation fireball of 1922-23. The entire “real economy” intensively deflated, also.

The euro, since 1999, has seriously deflated the Eurozone (and European) economy.

This is the real reason Mr Mario Draghi fears deflation – because his ECB caused it. However, preceding the forced introduction of the euro at a range of forced and unequal exchange rates of previous national monies, for the euro, there had been no serious inflation. The euro added New Deflation, to an already slowed and pre-recession European economy. It was a rabbit chop to the back of the neck for the European economy. Don't expect Mr Draghi to admit that!

What Does Draghi Do Next?
I can't answer for him. From his most recent press conference and recent ECB publications, we might imagine he is suffering Autocrat Fatigue. He appears to fear an imminent deflation “trap” in Europe and this fear is entirely rational. He created it.

The ECB's attempt (exactly like the US Fed, BOJ, BOE, etc) to “rekindle inflation” and present this as a simulacre pastiche equivalent of “a growing economy” fools nobody at all. Like the other central bankers, Draghi can no longer “push the print button” for more, more extreme QE, leaving him only the spoiler role of imposing tiny “punitive charges” on overnight deposits at the ECB by the region's private banks. The petty-minded Keynesian obsessionality of this is difficult to exaggerate.

Behind the scenes and in secret, for sure and certain plenty of ECB employees are working on the Plan B, which is a “controlled break-up” of the Eurozone and the direly-needed removal of Single Currency Status from the euro. As a go-anywhere travel check currency, possibly exchangeable for rye, beer or locomotives the euro can play a useful role, in Europe. Later on.

Several anti-Europe parties, in the Eurozone have at least responded to voter concern by including an Exit Strategy from the euro money, on their platforms. Where they have figured-in the real impact of deflation caused by the euro, over 15 years, they are forced to talk about real loss of wealth when people switch back to restored national currencies. France's Front National, for example has said that the best to hope for would be about 4.50 restored Francs for 1 euro. At entry to the euro, the French were forced to pay 6.55 Francs for 1 euro. This can easily become a slippery slope, with a stepwise increase of how much wealth national citizens will lose – when they dump the euro.

As a single money used to rob working people of their life savings, destroy several industries, and deflate the economy on a permanent basis – the euro was a great success! Countering its real economy effects by openly trying to kindle inflation, and possibly unleashing hyperinflation is Pure Anarchy. Draghi should immediately be removed from power. The Germans are right.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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