And the ECB?

To underscore the central message of this guest post: Central Banks are the only organisations which, theoretically, do not have to be afraid about their balance sheets. They can print the money. And in reality they indeed are the only organisations which never, ever experience balance sheet problems during financial crises. Check out this study of Muhammad Ben Ibrahim, p. 44.

From: Erwan Mahe (guest post)

The ECB remains surprisingly discreet in the face of a worsening economic situation, as evidenced by renewed declines in volume (retail sales in Italy and Spain, etc.) and price (headline and core CPI) indicators, as signs of the Eurozone’s fragmentation continue to grow (peripheral nation bank runs). Worse still, the role it continues to play in the stabilization process of distressed peripheral nations is producing disastrous results.

Bear in mind that the ECB had exacerbated the losses suffered by Greek government bondholders during the restructuring of 2012, by refusing any haircut for itself. In fact, it has just delivered the same body blow to the latest Cyprus deal, with the sanctuarization of the emergency loans (ELAs) granted by the island-nation’s central bank to the Cyprus Popular Bank. These loans will be transferred at their face value (thus, no haircut) to the Bank of Cyprus.

This transfer automatically shifts upward the losses of the other bondholders, entailing digging into the depository accounts of these two banks, with losses estimated as high as 80% for the biggest deposits!

The deal now done, I will not delve into the Cypriot saga or the role played by the Dutch finance minister and Eurogroup president, who has displayed a near criminal level of incompetency on various occasions, but I would like to cite the particularly revealing statement by his fellow citizen, Klaas Knot, president of the Dutch central bank and member of the ECB Board of Governors, about Mr Dijsselbloem’s unfortunate statements:

“The content of his remarks comes down to an approach which has been on the table for a longer time in Europe. This approach will be part of the European liquidation policy.”

It would appear that Dutch officials are trying to outdo German finance minister Schäuble in Mellonesque statements among the European Austrian School Ostriches. Andrew Mellon’s comments, cited by Herbert Hoover in his memoirs, are perfectly consistent with thoughts expressed by some of our northern neighbors:

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

The ECB remains stuck in a totally outdated and rigid view of money, like the supporters of the gold standard, as it refuses to grasp that, in our current context of deflation/disinflation, losses on its capital have no significance, quite the contrary. It can even operate with negative capital, given that it is the sole issuer of its own liabilities, and create as many euros as it sees fit.

The Fed has understood this truth for quite some time, given its inclusion in bylaws of a rule allowing it to delay indefinitely, without any need for recapitalization, any loss posted on its investment portfolio by assigning to them to future seigniorage revenue (MG).

In the meantime, data used for tracking monetary conditions on the Eurozone continue to deteriorate, as you can plainly see in two of our favorite graphs, below.

Retail sales and consumer lending

The latest available retail sales figures are for January but, given the consumer lending figures since then and the anxious global context, the situation does not augur well for the February and March publications.

ECB Balance Sheet

The “normalization” of the size of the ECB’s balance sheet has begun: is it really the right time?

The Macro Geeks corner:
Money and the Federal Reserve system. Myth and reality

G.THOMAS WOODWARD. July 31, 1996
Congressional Research Service Library of Congress / CRS Report for Congress, No. 96-672 E