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Nonsensical Global Worries Over Subdued Inflation: Yellen, Draghi, Kuroda

Central bank presidents at the Fed, the ECB, and Bank of Japan are all concerned over low inflation. The Fed wants to hike anyway, but the Bank of Japan will keep pursuing aggressive monetary easing. Meanwhile, asset prices are in the biggest ever bubble.

Bank of Japan

Bank of Japan Governor, Haruhiko Kuroda, says the BOJ Will Keep Pursuing Aggressive Monetary Easing.

“The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price stability target at the earliest possible time,” Mr. Kuroda said at a meeting of the Group of 30 in Washington.

“Achieving the 2% target is still a long way off,” Mr. Kuroda said.

“Once price increases become widespread, medium- to long-term inflation expectations for firms and households are expected to rise gradually and actual inflation will increase toward 2%,” he said.

ECB

‘It’s going to take time. We have got to be persistent with our monetary policy,” Draghi said on the sidelines of the meetings of the International Monetary Fund and World Bank in Washington, reported The Wall Street Journal.

Draghi gave an upbeat outlook on the 19-nation eurozone economy, but said inflation remains too weak, possibly due to subpar wage growth, he said. The ECB’s program of buying 60 billion euros ($70.9 billion) of bonds a month is set to expire in December. Policy makers are expected at a meeting on Oct. 26 to announce plans to begin scaling down the monthly purchases next year, but Draghi suggested the decision could be delayed again, the report said.

Fed

…click on the above link to read the rest of the article…

World’s Biggest Ever Junk Bond Bubble in Pictures: What Hath Draghi Wrought?

World’s Biggest Ever Junk Bond Bubble in Pictures: What Hath Draghi Wrought? 

In regards to ECB QE bond purchases, inquiring minds may be asking: What hath ECB president Mario Draghi wrought?

I can explain in one picture.

The answer in words: The world’s biggest junk bond bubble.

I prefer gold.

On August 4, I commented on the Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble

There’s a bond bubble for sure, but it’s in corporate bonds, not treasuries.

This also isn’t the first time Greenspan has expressed concern about a bond bubble. Two years ago, when the 10-year Treasury yield was 2.44% and the CPI was 0.2%, he told Bloomberg TV that “we have a pending bond market bubble.” In a Bloomberg TV interview July 2016, he expressed concerns about stagflation and said “we’re seeing the very early signs of inflation beginning to tick up.” He also said with the 10-year Treasury yield pushed down to 1.50% by Brexit concerns, that he was “nervous” bond prices were too high.

“No Irrational Exuberance in Stocks”

“There is no irrational exuberance that I can see. In fact, it is just the opposite at this stage.”

Greenspan the Contrarian Indicator

Major comments by Alan Greenspan, widely portrayed by the media are most likely perfect contrarian indicators.

He has been calling the bond market a bubble for years but only recently did he say there was no stock market bubble.

With Greenspan, one needs to be careful. He is frequently correct about some things. However, the things about which he is correct are either never widely published, or they are widely disputed.

…click on the above link to read the rest of the article…

ECB Negative Rate Experiment May Lead to the Worst Financial Crisis in Modern History

QUESTION: Mr. Armstrong; Your proposition that the quantity of money theory is dead seems to be a true earth shattering proposition. It certainly disproves the Austrian School and the events post 2008 support your statement.

The European Central Bank is supposed to traditionally pursue the goal of monetary stability. The Germans have followed the Austrian School of Economics religiously. However, the ECB has used monetary policy instruments attempting to create an annual depreciation of the euro of just under 2 per cent without success. Since the outbreak of the financial crisis in 2008, the function and importance of the ECB has changed fundamentally and drastically.

In order to avert a core meltdown of the global financial system, the ECB went beyond the American Federal Reserve and other major central banks, launching an extremely expansive monetary policy lowering the key interest rates to negative territory. This has never been done in history and the ECB experiment has created tremendous problems moving forward. Moving the deposit rate for commercial banks parking money at the central bank to the negative range of minus 0.4 per cent combined with began buying up large amounts of government bonds and later corporate bonds of the worst quality, has completely failed to stimulate the economy.

My question is this. Have the measures taken by the ECB resulted not averting a crisis, but transforming it into a far greater risk and simply extended the entire deflationary process?

Thank you

GK

ANSWER: Absolutely. This entire policy has failed to create inflation and has proven that inflation is not driven purely by the quantity of money. Confidence is the critical factor. The rich can move their capital to foreign lands. However, the average person cannot move their labor or money offshore.

…click on the above link to read the rest of the article…

 

European Banking Crisis

Perhaps this period will be looked back upon ass the Draghi Deflation. After nearly 10 years of this failed policy, the European banking industry is contracting on every possible level. The merger of Commerzbank to Merge with French BNP is one possibility. Commerzbank is a takeover candidate or shotgun wedding candidate, for good reasons. Its shares have fallen and are trading now at half their book value. When interest rates rise to bring back deposits, then the bank could perhaps get out of its deep hole. The German government, which has a 15 percent stake after a bailout in 2009, is ready to sell looking to raise cash itself.

The Draghi era of negative interest rates has proven to be a complete disaster. People have withdrawn money and preferred to buy safes. Major banks with branches in the USA have shipped their cash to the American branch and deposited at the Fed in excessive reserves. Meanwhile, with deflation dominating the European economy and rising taxation, the average person is just not interested in borrowing until they see the economy turn around.

On top of these issues, to survive, European banks have been withdrawing from proprietary trading, firing expensive staff with experience, and replacing them with inexperienced kids. Additionally, the low-interest environment and the decline in deposits has resulted in a major contraction in bank branches. As banks also move to online banking, they have been able to reduce staff. In 2016, the banks let go some 50,000 jobs. They were also able to close some 9100 branches throughout the EU, according to the European Banking Association.Consequently, now the banking work force has been reduced to 2.8 million people contracting back to 1997 levels. We will most likely see a further reduction of at least 5% going into early 2018. We will see further mergers and consolidation reducing jobs and branches into 2020.

See No Evil, Speak No Evil…

The Jackson Hole speeches of Janet Yellen and Mario Draghi last week were notable for the omission of any comment about the burning issues of the day:

…where do the Fed and the ECB respectively think America and the Eurozone are in the central bank induced credit cycle, and therefore, what are the Fed and the ECB going to do with interest rates? And why is it still appropriate for the ECB to be injecting raw money into the Eurozone banks to the tune of $60bn per month, if the great financial crisis is over?i

Instead, they stuck firmly to their topics, the Jackson Hole theme for 2017 being Fostering a dynamic global economy. Both central bankers told us how good they have been at controlling events since the last financial crisis. Ms Yellen majored on regulation, bolstering her earlier-expressed belief that financial crises are now unlikely to happen again, because American banks are properly regulated and capitalised.

Incidentally, more regulation hampers economic dynamism, contra to the subject under discussion, and confirms Ms Yellen has little understanding of free markets. Mario Draghi, however, told us of the benefits of financial regulation and globalisation, and how that fostered a dynamic global economy. But a cynic reading between the lines would argue that Mr Draghi’s speech confirms the ECB is in thrall to Brussels and big business, and is merely representing their interests. And he couldn’t resist the temptation to have a poke at President Trump by expressing the benefits of free trade.

Hold on a moment, free trade? Does Mr Draghi really understand the benefits of free trade?

That’s what he said, but his speech was all about the importance of regulating everything Eurozone citizens can or cannot do. It is permitted free trade in a state-regulated environment. It is a version of free trade according to the EU rule book, agreed with big European business, which advises Brussels, which then sets the regulations. It is a latter-day Comintern that allows you to trade freely only on terms set by the state for prescribed goods with other states of a similar disposition. Draghi’s speech was essentially justifying the status quo laced with Keynesian-based central bank dogma.

ECB – Draghi & Tapering

The European Central Bank (ECB) is expected to begin reducing its bond purchases gradually tampering its stimulation program of Quantitative Easing (QE). Nevertheless, reliable sources tell of the ECB being extremely cautious fearing what will happen if buyers do not appear and rates begin to rise sharply. The difference between the ECB and the Fed is stark. The ECB owns 40% of Eurozone government debt. The Fed does not even come close.

Obviously, the European financial markets have become addicted to the unprecedented inflow of cheap money even though there has been no appreciable rise in economic growth or inflation as was expected. This raises the question only asked behind the curtain: Will the economy spiral downward if QE ends? The Fed never reached the levels of ECB’s QE program so there is no comparison with the States.

The ECB expects to gradually lower the constant QE purchases of government debt in the Eurozone, which has really kept the governments on life-support. In part, this is why Macron is pushing to federalize Europe in its budgetary and financial markets. There is a fear that there will be severe distortions on the exchanges in the months ahead. What is hoped is that the Euro will decline and make the difficult weaning more tolerable by increasing exports and creating inflation. A lower currency will help to stimulate the Eurozone whereas a rising currency will only add to the deflationary pressures.

The ECB will most likely allow bonds to simply mature rather than sell them back to the marketplace. Any news of the ECB actually selling bonds would send a wave of panic through the European markets. Thus, the only practical way to approach this is to (1) reduce purchases and (2) allow current holding to mature and hopefully they money will be reinvested by the private sector.

…click on the above link to read the rest of the article…

Draghi: Trillions In QE Have Made Economies “More Resilient”

Draghi: Trillions In QE Have Made Economies “More Resilient”

When last night we previewed this week’s annual Jackson Hole symposium at which Mario Draghi is scheduled to speak just before the market close on Friday, we said that the ECB head is warming up for the trip by speaking at the Lindau economics symposium in Germany this morning “and as such he could front run himself.” Unfortunately for many who were expecting some advance highlights, Draghi disappointed those who hoped he would preview his Jackson Hole appearance.

So what did Draghi talk about? Instead of previewing the ECB’s inevitable taper (especially as the central bank will soon run out of Bunds to buy at the current pace of monetization), the central banker defended growing criticism of his unorthodox monetary policy, and said the ECB’s policies such as QE and NIRP, saying they have been a success on both sides of the Atlantic, and that the purchase of some $15 trillion in assets has somehow made economies “more resilient.”

Speaking to the Lindau audience of 17 Nobel laureates and 350 young German economists, a nation which has been one of the stiffest critics of ECB policies such as quantitative easing, Draghi’s speech avoided any specific hints on current ECB deliberations, and instead said officials must be “unencumbered by the defense of previously held paradigms that have lost any explanatory power.”

He then launched into a vocal defense of QE, saying that “when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power”

…click on the above link to read the rest of the article…

ECB Assets Hit 35% Of Eurozone GDP; Draghi Owns 9.2% Of European Corporate Bond Market

ECB Assets Hit 35% Of Eurozone GDP; Draghi Owns 9.2% Of European Corporate Bond Market

As global markets bask in the glow of the Trumpflation recovery, the ECB continues to be busy providing the actual levitating power behind what DB recently dubbed global “helicopter money“, by buying copious amounts of bonds on a daily basis (at least until tomorrow when the ECB goes on brief monetization hiatus, and Italy will be on its own for the next two weeks).

According to the latest weekly breakdown of what the six central banks acting on behalf of the Euro system bought in the week ending December 16, the ECB purchased at least 6 corporate bonds under its CSPP program.  The latest weekly purchase lifts the number of securities held to 773; this means that the ECB now holds 9.2%, (€50.6bn) of the entire European corporate market (€549.34bn outstanding).

The ECB bought bonds issued by AB InBev, Autostrade Per L’Italia, Knorr-Bremse, Snam and Uniper. 104 (~13.5%) of the 773 securities are negative yielding. Utilities remain the largest industry group with 207 securities.

For the week ending 16th December, the bond purchases stood at €0.7bn across sectors (vs. €1.6bn the week prior). The complete list of ISINs can be found here, courtesy of UBS. Last week, total EUR issuances worth €6.2bn were issued in the primary market, of which €0.23bn were CSPP eligible. For the month ending November, total CSPP holdings stood at €47.2bn, with 86% of the purchased amount coming from the secondary market.

What bonds has ECB bought into?

Looking at the break-up country wise, French and German issuers continue to dominate the ISIN count (395 issuances worth €294bn in amount outstanding). Bonds from non-Eurozone corporates were also on the list, with the bulk from Switzerland (24 issuances worth €17bn). When looking at the purchases by sector, Utilities remains the top pick (206 issuances worth €137bn), while non-cyclical consumer is a distant second (120 issuances, €93bn in amount outstanding).

…click on the above link to read the rest of the article…

Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct

Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct

Schaueble dismissed a suggestion this week by ECB head Mario Draghi that Germany should use fiscal room for manoeuvre to decrease its export surplus.

schaueble

Reuters reports Germany’s Schaeuble blames ECB for German Export Surplus.

Germany has no plans to reduce its export surplus, Finance Minister Wolfgang Schaeuble said on Friday, as the European Central Bank (ECB) has not changed its monetary policy which has led to a weaker euro which in turn boosts German exports.

“Even before the European Central Bank decided its policies of unusual monetary policy, which also led to the euro exchange rate falling significantly, I said that we will increase German export surplus,” Schaueble told reporters.

“If the surplus in the euro zone as a whole rises by a total of 3.6 percent, one should not be surprised that the German export surplus has also risen, if not by 3.6 percent but by 2 percent,” he said before meeting other European finance ministers.

When asked whether he had any plans to decrease Germany’s export surplus, Schaeuble said: “I haven’t heard that the ECB is changing its monetary policy.”

The Munich-based Ifo economic institute has said Germany’s current account surplus would probably hit a new record of 278 billion euros ($313.28 billion) this year, overtaking that of China again to become the world’s largest.

Resounding No

I take that as a resounding “no” to Draghi’s proposal that Germany should reduce its export surplus.

Target2

No discussion of eurozone problems would be complete without a discussion of Target2, an abomination created by the eurozone founders and one of the fundamental flaws of the euro.

…click on the above link to read the rest of the article…

This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings

This is How Draghi Will Sock it to Investors that Weren’t Invited to the Secret Meetings

They’re all getting ready for Wednesday.

Here’s what Draghi has accomplished recently: the prices of euro-denominated corporate debt have soared. The average yield of investment-grade debt is on the verge of dropping below 1%. A good part of the €916-billion market for corporate euro debt is already below 1%, according to Bloomberg. Highly rated corporate debt with shorter maturities is trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations.

Companies, including US companies, are scrambling to take advantage of this free money: They issued over €50 billion of euro-debt in May, the second-busiest month on record. On Monday, at least six investment-grade and junk-rated deals were announced. One of them was Air Liquide SA, which sold €3 billion in investment-grade debt. Four of the five parts of the deal priced with a yield below 1%!

They’re all getting ready for Wednesday.

June 8 is the propitious day everyone has been waiting for: the ECB – which is already buying government debt, covered bonds, and asset backed securities – begins buying euro-denominated corporate bonds. Maturities will range from six months to 30 years. It will buy these bonds either in the secondary market, where previously issued bonds are traded, or in the primary market, thus handing its freshly printed euros directly to the companies (“helicopter money” for corporations).

“The prospect of average yields below 1% is very scary,” Juan Esteban Valencia, a credit strategist at Societe Generale in Paris told Bloomberg. “Investors are being pushed outside their comfort zone to sectors like high-yield debt, where they may not have expertise.”

And where they won’t be paid for the risks they’re taking.

…click on the above link to read the rest of the article…

Negative-Interest-Rate absurdity is another “rabbit out of the hat.”

Negative-Interest-Rate absurdity is another “rabbit out of the hat.”

For the second time this year, Spain’s caretaker government just managed to sell 50-year bonds in a €3 billion ($3.4 billion) deal. Despite maturing in the year 2066, when many of us won’t even be alive and the duty to pay back the debt (assuming it still exists) will have been handed down to our children’s children, the bonds will pay an annual interest rate of just 3.45%. Not only that, but the issuance was over-subscribed by €7 billion.

This is a mind-blowing turn-up for a country that just four years ago needed an unprecedented bailout from the Troika to save its saving banks and avert total financial collapse. It is also a resounding testament to the power of central bank policy to turn economic reality on its head.

Less than three years ago, when Draghi had only just begun doing “whatever it takes” to save the single currency, the Spanish government had to pay a 5% yield to get investors to buy their one-year bonds. Now investors are willing to take 50-year bonds off the government’s hands in exchange for an annual interest rate of 3.45%, despite all the attendant risks involved.

While the Spanish economy has improved somewhat since then, that is largely due to the fact that the government has sacrificed long-term stability for short-term growth, going so far as to plunder half of the nation’s social security reserve fund in order to keep spending at its current levels. The remaining half is exclusively invested in Spanish bonds. Even Brussels now admits that Spain’s public debt is out of control.

To make matters worse, Spain doesn’t have an elected government to speak of and could struggle to form one even after the next round of elections, on June 26.

…click on the above link to read the rest of the article…

The Central Bank War On Savers—–The Big Lie Beneath

The Central Bank War On Savers—–The Big Lie Beneath

The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino.

Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice.

That’s right. A return that amounts to one Starbucks’ cappuccino per day on a $200,000 nest egg is purportedly not the result of massive central bank intrusion in financial markets and pegging interest rates at the zero bound; it’s owing to a global “savings glut” and low economic growth.

Thus, Mario Draghi insisted recently that ultra loose monetary policy and NIRP are,

……… “not the problem, but a symptom of an underlying problem” caused by a “global excess of savings” and a lack of appetite for investment……This excess — dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman — lay behind a historical decline in interest rates in recent decades, the ECB president said.

Nor did Draghi even bother to blame it soley on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxcon factories assembling iPhones. Said Europe’s mad money printer:

The single currency area was “also a protagonist…….”

Actually, that’s a bald faced lie. The household savings rate in the eurozone has been declining ever since the inception of the single currency. And that long-term erosion has not slowed one wit since Draghi issued his “whatever it takes” ukase in August 2012.

…click on the above link to read the rest of the article…

Draghi espouses the old “excess savings” nonsense

Draghi espouses the old “excess savings” nonsense

From today’s Open Europe news summary:

DRAGHI REBUKES ECB GERMAN CRITICS

In a speech on Monday, the President of the European Central Bank, Mario Draghi, delivered a blunt rebuke to German criticism of the ECB’s low interest rate policy saying “There is a temptation to conclude that…very low rates…are the problem… But they are not the problem. They are the symptom of an underlying problem.” The real problem, Draghi argued, was the excessive amount of global savings a significant part of which was caused by Germany’s large current account surplus.  In what was seen as a thinly veiled attack on Germany’s finance minister, who has argued for an end to ECB stimulus, Draghi also noted that “Those advocating a lesser role for monetary policy or a shorter period of monetary expansion necessarily imply a larger role for fiscal policy.”

Source: The FT The Wall Street Journal

It is time for ECB president Mario Draghi to go home. He has run out of ideas and excuses. To wit, the above criticism of German bankers who, he says, do not understand that the real cause of low interest rates is not the ECB’s massive interventions into the bond market, but that the world saves too much and the Germans produce too much of what the rest of the world wants to buy.

Let’s get one thing very clear–there is no such thing as saving too much, just as there is no such thing as too much capital accumulation.  Capital accumulation is the foundation of all economic progress. Without capital accumulation there can be no further division of labor and no further increases in the productivity of labor. Savings–real savings, not fiat money creation–are required for capital accumulation; i.e., postponing consumption today in order to enjoy a higher standard of living tomorrow. 

…click on the above link to read the rest of the article…

The Road to Canossa

That the artificial interest rates in evidence in our hugely distorted capital and money markets can be made negative in nominal as well as in real terms is, alas, the curse of the modern age. Though entirely at odds with natural order – as we have repeatedly tried to make plain – they are also a curse that we are unlikely to have lifted any time soon, especially not in a Europe where there is no effective restraint to be had upon the exercise of his awful powers by the likes of a fanatic like Draghi.

Like some latter-day Pope Gregory, Draghi pretends to a power superior to that of the secular realm’s rulers. Forgetting that it was an act of political will which first set up the ECB, he now demands that the Lords Temporal of the Eurozone shuffle barefoot through the snows, like the Emperor Henry IV before them, to genuflect before him at his seat at that modern Canossa which stands on Sonnemannstrasse.

Though the ‘mandate’ which he unfailingly invokes in place of a claim of descent from St Peter was indeed intended to keep the Bank insulated from the worst, inflationary impulses of the short-horizon politician, it cannot be argued from that one act of self-denying foresight that the ECB is now only subject to a higher court. Laws are, after all, made in parliaments and when it becomes evident that among those laws there are those that have either been made obsolete by events or have become subject to exploitation by the unscrupulous, it is the duty of the people in parliament to highlight such abuses and to set in train the process by which the offending laws will be revised or repealed.

…click on the above link to read the rest of the article…

Draghi at War with Reason & Other Central Banks

Draghai Euro Crisis

Tensions are starting to rise between Germany and the ECB because Draghi will not admit his negative interest rates are causing an economic meltdown. “We continue to expect them (interest rates) to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” Draghi is absolutely clueless and this experiment has no end game. The rest of the central banks are starting to see that Draghi is risking it all for he cannot admit failure. Inflation is a function of interest rates insofar as the rate of interest is compatible with the expected rate of inflation. This is fundamental. Punishing savers and wiping out pensions is not the way to create a future. This will not end very nicely.

All Draghi is doing is making the smart banks richer. They don’t have to pay anything, but they charge people money for having an account. Yet, if you want to take out a mortgage for 10 years, fully collateralized, they demand 5%. The smart bankers are making the widest spreads in history on a percentage basis between bid and ask. Is Draghi insane? Or is he simply looking at this from the perspective of his former employer — Goldman Sachs?

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