Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

ECB Rhetoric versus Reality on Money Printing

Interest-Rates / Quantitative Easing Dec 22, 2011 - 05:29 AM GMT

By: Ben_Traynor

Interest-Rates

Best Financial Markets Analysis ArticleThis week, the gap between what the European Central Bank says and what it does became very noticeable indeed...

I know they're stolen, but I don't feel bad. 
I take that money, buy you things you never had. 
'Free Money', from the album 'Horses' by Patti Smith


THROUGHOUT THIS CRISIS, the European Central Bank has stuck to the mantra that its job is to ensure price stability above all else.

It has, for example, objected to suggestions that it might fund the European Financial Stability Facility, the Eurozone's 'temporary' bailout mechanism that now looks like it may hang around a bit longer than first anticipated (whether it will have much money to lend to troubled Eurozone governments is another matter).

There are signs, though, that its attitude may be changing. A considerable gap has opened up between the ECB's rhetoric and its action, with central bankers talking tough on inflation while pursuing ever looser policies. This disconnect was plain to see on Monday when ECB president Mario Draghi addressed the European Parliament in Brussels.

"The Governing Council of the ECB," said Draghi, "is determined to ensure that inflation expectations continue to be firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term."

So far, so anti-inflationary.

"The latest monetary data reflect the heightened uncertainty in financial markets. Looking beyond short-term volatility, the monetary analysis indicates that the underlying pace of monetary expansion remains moderate."

Draghi is not wrong. The chart below looks at money supply in the Eurozone, the UK and the US over the last two years. The vagaries of money supply data mean the comparisons are not exactly like-for-like. The US Federal Reserve, for example, stopped publishing its M3 broad money measure in 2006. The Bank of England meantime does publish an estimate of M3 for the UK, following the methodology used to calculate Eurozone M3, but by necessity it involves a degree of estimation.

Nonetheless, if we index each series we can see that Eurozone money supply (the blue line) has been more stable than that of both the US (green line) and Britain (red line):

US money supply appears to have merrily grown throughout the period, while the effects of the UK's first dabble with quantitative easing in March 2009 can be seen coming through nine months later (and, of course, though the effects are not known yet the Bank in October expanded its QE program, and may do so again if the latest Monetary Policy Committee minutes are anything to go by).

The problem for the ECB and its pursuit of price stability is that its "moderate" pace of monetary expansion may well be a key reason why the Eurozone has ended up as the epicenter of the global financial crisis. Because while the Fed and the Bank of England have gone to historic lengths to get funds to where they are desperately needed – the banking sector and (whisper it) government – the ECB has lagged behind.

There is a phrase we use here at BullionVault to sum up what we believe to be the most likely ways out of the ongoing crisis: Default or Devalue. In the absence of meaningful economic growth, existing debt burdens will either be defaulted on, or they will be repaid once their real values have been sufficiently eroded by inflation. 

By standing in the way of the latter, the ECB has arguably made the former seem much more likely – hence the Eurozone debt crisis.

But things have changed. Now that Old Man Trichet has shuffled off into retirement, Super Mario can finally open the spigots and (he hopes) prevent liquidity-starved Europe from collapsing into a morass of sovereign defaults and bank failures. This would explain why, as well as restating the ECB's anti-inflation priorities, Draghi was keen to tell the European Parliament about "the latest non-standard measures" from the ECB.

These include a €40 billion covered bond purchase program, a reduction in the amount of cash banks are required to hold at the ECB and a "temporary expansion" of the list of collateral that banks can put up when borrowing from the ECB (banks, it would seem, are running low on decent assets – or else they just don't want to risk them. So the ECB will accept collateral of ever-more questionable value, including the very Eurozone government bonds that have caused it – and its balance sheet – such grief already).

And, on Wednesday, we had the Big One. The first of the ECB's three year Longer Term Refinancing Operations (LTROs) – whereby Europe's banks could borrow money for three years at interest rates of 1%, and against iffy collateral to boot.

"This is basically free money," one banker in Germany said before the result of the LTRO was announced.

"The conditions are unbeatable. Everybody who can will try to get a piece of this cake."

He was not wrong. A total of 523 institutions borrowed €489.191 billion – higher than most analysts had predicted (and more than the original lending capacity of the EFSF, which maybe tells you something about politicians' and technocrats' ability to appreciate the full scale of a crisis).

The announcement saw stock markets sell off – possibly because it is an indication of just how bad a state Europe's banking system is in. The Euro's recent rally against the Dollar also went into reverse, while gold prices – which have moved closely with the Euro in recent days – also fell from their week's high.

It seems very much as if Europe's central bankers are now looking to catch up with their Anglo-Saxon peers, choosing (whether consciously or otherwise) the Devalue option rather than run the risk of Default. But it will probably be a while until the rhetoric changes.

Earlier this week, Germany's Bundesbank grudgingly agreed to contribute an additional €41.5 billion to the International Monetary Fund, but only on condition that the money was not earmarked for Europe. 

The Bundesbank is fooling no one. It must realize there's a very good chance that, some time in 2012, a phone will ring at the IMF's Washington headquarters:

"The Lagarde residence, the lady of the house speaking...Oh it's you Spain, how can I help...Hang on one moment, I've got Italy on the other line..."

Still, the central bankers get to say, with as straight a face as they can manage, that they are not directly financing government debt.

If it turns out that the world does become awash with fresh Euro liquidity then, unless gold decouples from the single currency, this could be a bearish development for the yellow metal.

Eventually, though, investors must surely realize that there is a world of difference between a tangible asset value for thousands of years and a political project that looks like it could come undone after little more than ten years.

The debt crisis shows little sign of coming to an end. And history shows us that when debt crises are eventually resolved, it tends not to be good news for the creditors.

By Ben Traynor
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in