In response to an article by Martin Wolf on 10th May 2016, entitled ‘Germany is the Eurozone’s biggest problem’
“Why is conventional German thinking on macroeconomics so peculiar? And does it matter?”
I‘ve got a slightly different question:
Why is macroeconomics so peculiar, and does conventional German thinking on it matter?
The answer to the first part is that macro-economists use equilibrium models to describe a fantasy world that doesn’t exist outside of a textbook, and the answer to the second is ‘yes it does’ – the pigs ear we call the Eurozone doesn’t work for the majority of its members, and as a result of that, is doomed to fail for all of them – conventionally or unconventionally. So whose fault is that?
“Germany is the Eurozone’s biggest problem”
Tommyrot. The biggest problem is this - the euro is a dunce’s solution to a problem dishonestly framed. Don't pin it on Germany – the dunces were from a variety of nations. This is how it began. By:
1. Concealing the designers' motivation for the euro to be a half-way house to Federalism; failing to confront the fact that without fiscal union, the euro is nothing more than a glorified peg, and pegs always break
2. Creating a half-baked monetary union resting on 19 separate bond markets
3. Going through the motions of having a set of rules that have been bent, twisted and ignored from day 1
4. Inviting countries ill-equipped to cope with having their debts effectively converted into Deutschmarks on day one. Compounding this error by ignoring their off balance sheet liabilities and other 'frauds' e.g. Goldman Sachs hiding the real state of Greek finances
5. Bailing out the banks by transferring their bad loans to European tax payers
6. Pretending that these banks are fit for purpose, when it is clear to anyone paying attention that if their assets were marked to market, they would be insolvent
And where are we now? According to Mr. Wolf and Mario Draghi:
‘The low interest rates set by the bank are not the problem. They are instead “the symptom” of insufficient investment demand’
Yes - this is all explained on pages 489 to 1500 of the aforementioned textbook. Pages 1 to 488 describe how carts pull horses and water flows uphill.
The German's don't seem to agree with those pages. Not only that, they had the audacity to criticise the ECB, and threaten the sanctity of ECB independence. Naturally, this is out of order. Of course central banks are independent, and never bow to pressure from governments, banks or other central banks…meanwhile in other news Vladimir Putin’s real name is Morris, Gordon Brown loves to boogie, and Kim Jong-un has never eaten a donut in his life.
In the background to this latest episode of 'the German problem', the insane monetary policies of the past decade are taking a new turn. Mario Draghi’s latest ‘whatever it takes and believe me it will be enough’ routine, is a plan to buy corporate bonds. This includes the bonds of companies incorporated in the euro area, with parents overseas. According to a recent analysis by Deutsche Bank, the market available to the ECB is €865bn, and they expect the monthly purchases to be in the region of €5bn a month initially - which in central banking parlance means ‘until it is clear that €5bn isn’t enough’. In effect therefore, Mr. Draghi is supporting two strategies, one global, one regional:
a) Providing extra liquidity to the global market at a time when the Fed is tightening (by tightening I mean not easing)
b) Providing another means to weaken the euro in support of his inflation target, as overseas corporates convert their ‘Draghi euros’ into their local currency
One consequence of this will be to help prop up the next round of zombies. In other words - provide liquidity to companies that would not survive in anything remotely approaching a free market, AKA an attempt to fix an insolvency problem with a liquidity solution. We can expect to see an increase in the number of companies opening a new office, or should I say ‘post-box’, in Dublin or Luxembourg. Neither should we be shocked by any sudden increase in energy companies ‘seeking European expansion’. In short, this is the ‘Draghi Put’.
What this will do is to continue the erosion of the pricing mechanism. Markets are increasingly being turned into ‘policy vehicles’. Central banks are more and more entwined in the markets, making any talk of ‘normalisation’ increasingly ridiculous. They may say they ‘want out’, but their actions say they ‘want in’.
Central Bankers like to portray themselves as benign monetary doctors, assessing the ‘patient’ from an objective viewpoint, administering medicine as necessary. They are no such thing. Central banking is more akin to a parasite within the patient, destroying the immune system of its host. The immune system of capitalism exists through the pricing mechanism; a complex system of supply and demand signals that tell one part of the body what another part needs. Central banks are destroying that through the injection of monetary morphine like QE, ZIRP, and the latest narcotic NIRP.
Every new round of this monetary narcotic weakens the economy further, making the magnitude of shock necessary to de-stabilize the system ever smaller. The central bankers are aware of this, which is why they are afraid to allow anything to fail, and why the Fed will dispatch an FOMC member to a microphone every time Ray Dalio sneezes. Capitalism cannot work if nothing is allowed to fail…and alas it is getting to the point where my Nan’s chip-shop is too big to fail…which is tragic since she’s been dead for twenty years and never owned a chip-shop…
Eventually, either these monetary quacks will be expelled from the body of capitalism, or they will take it over and replace it with a centrally planned nirvana, or a nightmare, depending on your point of view. Sooner or later however, it will become a nightmare for everyone, because socialism always runs out of money, even socialism for the rich.
On the bright side, at least in the long term, this isn’t a fair fight – you cannot subdue the individual wants, needs, creativity and sheer bloody-mindedness of 8 billion people and replace it with the hubris of 100 individuals worldwide; people who mark each other’s homework and think that the economy is a math problem. The ‘Draghi put’ will be no more effective in the long run than the Greenspan, Bernanke, Yellen, or Kuroda puts have been. They fail because they exacerbate the problem, not cure it. Thus, the complex worldwide organism called ‘the market’ will eventually flush out the money printers. It will come to that, because they will not go voluntarily; because they will not admit their mistakes; because they will not do the honest thing or the ‘decent’ thing and say:
‘Hey folks this isn’t working; we’d better get together and sort this out before the global Ponzi scheme collapses. We need a massive debt re-structuring; a reset of the global monetary system, and a banking system that serves the real economy rather than one that makes Vegas look respectable. Enough now - we need the dog to wag the tail, not the other way round’.
They won’t do that. And thus, we are heading for a collapse in the confidence placed in governments and central banks, which will lead to a sovereign debt crisis and carnage in the bond markets. One way or another, this insanity will end. But when it does, it will not be the fault of the Germans.