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Thursday, 22 January 2015

ECBs Mirage to Recovery: Last desperate gasp of "Whatever it takes"

Well my friends, the European Central Bank just signed it's death certificate in the form of launching a 1.14 Trillion Euro Quantitative Easing printing press with their last gasp of "We will do whatever it takes" desperation.

Below are several articles that outline some of the most important aspects of this highly questionable, barely legal,  already-proven-not-to-work move, to try and generate at least a mirage of "recovery" to shimmer in front of the uneasy public of the European Union.

While this might look like a "European problem" to the general populous of North America, this action by the ECB will have global ramifications of epic proportions.  Hell.... even some of the fine print gives quite a large peak into what's next.

I will highlight several sections that I think everyone should taken note of.


ECB announces milestone €1.14tn ‘easy money’ program

Published time: January 22, 2015 13:43
Edited time: January 22, 2015 14:42

Reuters / Ralph Orlowski
Reuters / Ralph Orlowski

The European Central Bank announced it will embark on a fully-fledged quantitative easing program from March, which will break down to €60 billion per month. The move is made to counter a triple-dip recession in the eurozone.
ECB President Mario Draghi's press conference is live here
“Under this expanded program, the combined monthly purchases of public and private securities will amount to €60 billion, intended to be carried out to 2016,” Draghi said Thursday. The bank will buy €1.14tn ($1.3 trillion) in government debt, a decision that will inject extra money into supply, spurring a devaluation in the currency.
After the announcement, the euro fell 1.15 percent against the dollar, to $1.14.

The ECB Releases The Details Of Its Debt Monetization And Money Printing Program

Tyler Durden's picture

Those curious to learn why Greece is the only country excluded form the ECB' QE (for now) as the soon to be former Greek PM Samaras said moments ago...
... will not find any additional information in the ECB's supplement on its asset purchase program. Neither will they learn why something that is in effect monetary financing, and is prohibited by Article 123, is not monetary financing. However, they will learn that the proceeds from the ECB's money printing can be used "to buy other assets and extend credit to the real economy." The ECB adds that "In both cases, this contributes to an easing of financial conditions." Actually the only thing it will contribute to is making the world's billionaires into the world's trillionaires....

Here Are The Negatives In Today's ECB QE Announcement

Tyler Durden's picture

Everyone knows the positives, or rather positive, even if nobody at the ECB is willing to come out and say it: the ECB's QE - whose structural details were laid out previously - will boost stock prices, and... that's it. Who benefits as a result of this has now become a socioeconomic and philosophical discussion.
So here, courtesy of ADMISI's Marc Ostwald, are the negatives:
  • Risk sharing is very limited, with national central banks taking 80% of the risk on sovereign bond purchases, and rather un-reassuring was Draghi's comment that "most national central banks have adequate buffers to absorb a negative event" - most being how many.
  • Not good news for Greece, while it and Cyprus will be eligible for purchases of govt under a 'waiver' for (bail-out) 'programme countries', the ECB already has a very high volume of Greek bonds on it balance sheet from the SMP programme, and given a limit on total holdings for each sovereign issuer, it will not be eligible for purchases until it redeems debt in July asnd August. It should be added that other Italy and Spain and other bail-out countries will implicitly also have a lower available volume of total purchases, until SMP holdings are redeemed.
  • BUT perhaps the key aspect relates to the limits on the 25% limit on purchases of a single issue, which ensures that the ECB adheres to the ECJ's ruling about the ECB ensuring that is does not interfere with "price formation". So here's the key aspect, there are some $12.0 Trln of FX reserves in the world, of which roughly a quarter are held in Euros. Operating on the traditional metric that roughly half of those will be invested in Govt Bills and Bonds, this means that FX reserve managers will have to be involved in the process of establishing prices for whatever is purchased under the Govt bond QE programme. Eminently anything that is sold by central banks will not find its way into the private financial sector, therefore that EUR 60 Bln figure may often overstate what is being injected into the market.
  • Last but not least, the expanded programme does not start until March 15, so "Mr Market" now has a very long waiting period to sit on holdings of EUR debt before selling to the ECB, and with plenty of event risk in the world, starting with the Greek election, and to mention the prospect of an imminent Ukrainian default. Sort this under an uncomfortably long period before the QE 'party' gets started.

ECB To Print Trillion Euros – Gold Could Surge 40% In 15 Minutes Against Euro, Dollar

Mario Draghi is preparing to unveil QE today as the ECB looks certain to announce it’s much anticipated quantitative easing (QE) program. The move to print up to €1 trillion euros in the coming months appears to be a fait accompli although it will occur against a backdrop of strong German resistance and many concerns.
Following leaks that mainstream news sources regard as credible, the ECB is expected to announce monthly purchases of €50 billion in government bonds of member states.  The scheme is expected to run from March until the end of 2016 – for some 21 months – bringing the total to around 1 trillion euros. The ECB’s balance sheet currently stands at about €2 trillion.
Proponents argue that the move should or will prevent deflation and help revitalise the ailing euro zone economy.

It is hoped that QE will counter low euro zone inflation by increasing the amount of money available to financial institutions and to encourage lending by banks.....

Many have voiced concerns about the ECB QE including Angela Merkel, Axel Weber and Andrew Sentance.
Weber, the former head of the Bundesbank cast doubt on the future viability of the euro yesterday. He said that if countries do not follow Germany in imposing structural reforms to boost their longer-term growth rates the euro would not survive.
He called the probable introduction of quantitative easing by the ECB as “only part of the fix.” Weber, now the chairman of UBS, said there were legitimate questions hanging over the viability of the single currency.
Andrew Sentance, formerly of the Bank of England’s monetary policy committee, and now senior economic adviser to Price Waterhouse Coopers, said the euro zone is not the environment where QE is going to be effective.
UK economist Roger Bootle of Capital Economics told the BBC yesterday “I am not the greatest fan of quantitative easing – I don’t think it’s going to cure the European malaise. The point is, there is not much else in the locker.”
Angela Merkel continued to make Germany’s concerns known as late as yesterday indicating once again the lack of consensus among European policy makers. “The ECB hasn’t made any decisions yet,” she said at a press conference yesterday.
Germany’s greatest concern from Merkel’s point of view is that Germany does not end up on the hook for losses of defaulting peripheral nations.
Germans believe they should not have to underwrite weaker EU economies debts, via the printing of money by the ECB, while having no executive power over how those failed economies are structured.
“It’s important for me, as a politician, that all signals have to be avoided that could be perceived as weakening the necessity for structural changes and closer economic-political cooperation in euro zone countries.”
“That definitely has to be countered. We’ll have to wait and see about everything else,” she said.
A prospective compromise which is being widely reported is that the National Central Banks (NCBs), rather than the ECB, would purchase bonds and be responsible for any default.
Such a measure would encourage member states to press ahead with reforms rather than papering over their problems with free money in the expectation that defaults suffered by the ECB would be sustained by the stronger countries.
The ECB, like any central bank, has limited policy tools. In the wake of the crisis of 2008 the ECB reduced interest rates to zero in a failed attempt stimulate borrowing among populations saturated in debt.
It then engaged in confidence tricks – (the famous “whatever it takes” statement) – in the hope that confidence would make structural difficulties within the EU go away.
The last tool in a central banks arsenal is money printing and so the moment of truth for Mario Draghi has arrived.....

As such the money did not trickle down to the real economy and inflation did not take hold. The lesson will soon be learned that wealth cannot be generated by printing money – nor can sustainable economic growth.
Despite two waves of QE from the U.S. and Japan, deflation is taking hold globally. Oil, copper and lumber prices are stagnating indicating very weak economic activity worldwide....

Central bank prophet fears QE warfare pushing world financial system out of control

Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties







The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015.
Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.
"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."
Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.
He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.
He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?" he told The Telegraph before the World Economic Forum in Davos.
"QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market," he said.
"Even after the stress tests the banks are still in 'hunkering down mode'. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up," he said.
The warnings come just as the European Central Bank prepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it.
The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best.
ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a "wealth effect", but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base.
Mr White said QE is a disguised form of competitive devaluation. "The Japanese are now doing it as well but nobody can complain because the US started it," he said.
"There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.
"The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries - especially in Asia and Latin America - have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up."
Mr White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.
He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.
Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.
Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. "The only choice they had was to take a blow to the left cheek, or to the right cheek," he said.
He deplores the rush to QE as an "unthinking fashion". Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing "correlation with causality". The Anglo-Saxon pioneers have yet to pay the price. "It ain't over until the fat lady sings. There are serious side-effects building up and we don't know what will happen when they try to reverse what they have done."
The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."