Tuesday, 25 September 2018

The ECB, 1920s hyperinflation and the Son of the Bundesbank

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Anthony Peters, SwissInvest Strategist

Yes, Thursday enjoyed something of a relief rally but not until it had begun in a fully blown mood of doomsday revisited. Both Italy and Greece look to have moved forward but given how fast and how far they had moved in reverse, this doesn’t mean much. The appointment of Lucas Papademos (or Papadeemos as they call him on the radio here) as Greek PM with a bit more of a remit than the mere 100 days that the politicos had at first fought for finally shows that the scale of the crisis is being acknowledged. Likewise, the shift towards a “technical government” in Italy demonstrates the same thinking.

Markets were more than happy to come up for air again yesterday but it is still a long, long way from acknowledging that something has to be done to actually getting it done.

Maybe the Germans at the ECB would do well to look at (Japan) before they get all wrapped up in the hyperinflation of the 1920s

I shall therefore return to the big drum I have been beating for so long and repeat the simple mantra that cutting deficits is all fine and dandy but that the debt piles continue to grow nevertheless until either the country returns to a primary surplus or until inflation exceeds the debt to GDP ratio, thus debasing the value of the debt mountain at a faster rate than it is growing.

Despite all the money printing by the central banks, there is no immediate sign of the latter occurring and, to be frank, the former doesn’t look like a slam-dunk either. I understand that quoting Japan’s equivalent numbers is something of a no-no but it is now running with a debt/GDP ratio of around 200% on the back of endless quantitative easing and yet the average CPI for the past decade has been negative at -0.2%. Maybe the Germans at the ECB would do well to look at that before they get all wrapped up in the hyperinflation of the 1920s.

No prodigal Son of the Bundesbank

I always had the highest regard for the old Bundesbank and was delighted when the ECB became what we then referred to as “Son of Bundesbank”. However, globalisation and the ascent of East Asia and India has left most of our traditional Western economic and monetary theory firmly anchored to a bed of quicksand. If there were one criticism I would apply to the EU (and trust me, I have a warehouse full to choose from), it would be that it continues to pursue its socio-idealistic dreams with complete disregard for the way in which the world around it has been changing and to what other economic power blocks might be thinking and, more to the point, doing. Its single-minded approach to the Tobin Tax is a case in point.

I was somewhat struck by the generous words of Portugal’s president, Anibal Cavaco Silva, and his call for the ECB to be the lender of last resort and where he called for it to stop the rot in Italian bond prices with “foreseeable, unlimited” purchases. Although I believe that the German obsession with its monetary crisis of nearly a century ago is exaggerated, I do understand its objection to the concept of the ECB providing a blank cheque in moral hazard insurance. He seems to be confusing a lender of last resort with a lender of permanent resort.

The Argentinean default has shown that once the issue is resolved, albeit in an explosive manner, growth can resume fairly quickly. It took that country around three years to find stable footing. The adoption of countries such as Italy which never even came close to meeting the Maastricht criteria into the single currency in expectation of a gradual and continuing improvement in their fiscal metrics has proved to be a near disastrous mistake.

Opening the ECB’s wallet to all comers at all times would certainly have the same effect, irrespective of what promises are being made now when all is looking bad. “Mummy, Mummy, pretty promise, I’ll never nick a fiver out of your purse again in order to buy Crack”. Yeah, yeah, sure.

Deutsche sees inevitable eurozone recession, albeit short

So we continue to bask in the glory of not having fallen off a cliff yesterday and the mood going into Friday isn’t too bad. Nevertheless, the prospects for the eurozone economy remain doubtful. I heard Gilles Moec, co-chief European economist at Deutsche, on the radio this morning – I had the enormous pleasure of having worked with him at BofA in the past. He confirmed their view that a European recession is pretty much inevitable. However, he expressed optimism that it would be a shortish affair and that they were optimistic that it would not turn into anything more sinister. With the US barrelling on at a tidy 2-1/2% and Asia still doing nicely, he might well be right. Nevertheless, this continent must address the issue of its global competitiveness; it cannot rely on the Germans to do everything for it.

Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. Wear your poppy with pride while considering our brave Swiss fighter, FIFA supremo Sepp Blatter, the man who tried to ban our footballers from showing respect for those who gave their lives in defending democracy.

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