Negative interest rates threaten a true European crisis...
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, writes Sean Corrigan on True Sinews, in this note reposted by the Cobden Centre.
Though entirely at odds with natural order – as we have repeatedly tried to make plain – negative rates 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in parliament to highlight such abuses and to set in train the process by which the offending laws will be revised or repealed.
Draghi may bluster all he wants, but his is the office of an unelected technocrat and as such he is only there at the sufferance of the people, speaking through their democratic representatives. He is not God's instrument on Earth, immune to all challenge or limitation short of the throne of Heaven. The politicians – in a rare moment of self-awareness – chose to put certain matters beyond their immediate sway for the greater good of all. But now that the instrument of their altruism has itself become a scourge of the common weal, can we really argue that they should stand helplessly by, pleading their utter inability to root out the source of the pestilence?
Moreover, the goal of having the solitary, chosen economic indicator of Harmonized Consumer Price Inflation follow some entirely arbitrary, but allegedly ideal pathway – which Draghi would have us believe is the Alpha and Omega of his 'mandate' – was only ever intended to be an easily-communicated and readily comprehensible cipher for the Bank's practice of a responsible and well-reasoned oversight of certain narrow aspects of a much wider field of economic activity. It was never meant to be proposed as an end in itself, much less fashioned into the key to a Pandora's Box of monetary madness. Rather, by implication, it was meant to enable the Bank to take only those steps which were sufficient to minimize the impact of mere monetary disturbances, whenever they arose, on the everyday commercial decisions being taken in their untold millions by the many who routinely utilize that money.
Draghi, by contrast, has knowingly used the largely exogenous deviation of the datum from its selected, 2% per annum path as an excuse for a day-and-night campaign of monetary carpet-bombing, one which metaphorically threatens to leave the Continent's economic infrastructure in a Dresden-like state of devastation and to reduce the people wandering among its smoking heaps of rubble to a similar state of disorientation and dispossession.
But can Draghi's seemingly obsessive ambition to enforce his will really involve no more than his blind devotion to a ludicrously narrow and largely context-free economic indicator? Surely not. For would that not be seen as senselessness of such a self-evident nature that someone, somewhere would arise to overthrow the tyrant and so restore the Eurozone to sanity?
Could it be instead that the wilfulness of this particular Lord of Misrule is tolerated because the hidden goal is to forge a European political monolith out of the crisis even if it entails laying waste to the savings of, underwriting the bad government over, and rendering impossible any rational capital allocation by some 330 million lost souls (and likewise for many tens of millions more of their hapless near-neighbours).
Seen in this context, 'Whatever it takes' is not some occult intent to force enough non-oil goods and services to rise in price, in the face of energy's largely benign fall, by exactly enough to average the whole out at the hallowed 2% rate of gain as an act of expiation of an angry divinity. Rather it forms part of a conscious plan to break the resolve and to submerge the separate identities of those who still have the temerity not to view Brussels as the New Rome whose every command should be obeyed, but who instead see their own well-founded national institutions and their own revered traditions as forming the framework within which to conduct their actions and shape their lives.
Witness the recent excursion into print by the Buba's Jens Weidmann and his French counterpart François Villeroy in which they argued the case for a Euro-wide finance ministry. This is an issue so hateful to German ears that the former – a man who has carefully cultivated a persona as the people's champion (while never quite being able to defend what it is the people wish to be defended) – rushed to issue a partial retraction the following day by explaining that it was only a Gedanken piece and not a serious policy proposal.
Well, perhaps. But the reader should find his antenna twitching at such a foray as the Open Conspiracy to which we are all subject works by the careful floating of trial balloons exactly of this kind. Then – the seed having been planted in the public's mind – the game is that those of the elite who are party to that conspiracy (as well as their more slavish imitators in the media) reiterate the relevant soundbites with increasing frequency so that the pertinent phrases become programmed into the mass consciousness. That being accomplished, the radical concepts to which the slogans refer now appear wholly uncontroversial, not to say commonplace, and so the way is opened for their later implementation.
For a perfect example of this kind of multi-pronged manipulation of public opinion look no further than the fury which has been orchestrated regarding that egregious, presumably criminal, infringement of personal privacy which comprises the latest cause célèbre, the Panama Papers – a manufactured outrage which is nothing less than an invidious attempt to gull the masses into allowing even greater control to be exercised by a profligate and importunate state over everyone's hard-earned assets, not just those of the heinous One Per-cent whom they abhor.
Faced with such events, the darker thought intrudes – and has indeed been voiced in the upper echelons of Hungary and the Czech Republic, among others – that certain other of Europe's present raft of self-inflicted woes might also find their origin in this same process of deliberate national dissolution. Did not Wolfgang Schäuble, of all people, take a break from criticizing the ECB to tell a University of Basel audience that the grand European Project always made its greatest advances in moments of crisis and that, therefore, the existentially threatening Volkseinwanderung was actually an 'opportunity' whose very scale left him 'thoroughly optimistic'?
Be that as it may, the relentless spiral of lower rates – passing the baton from the Japanese to the Europeans, from the Swiss to the Scandinavians and back again – appears to have no obvious bound. Indeed, Draghi's latest arrogation to himself of the power to buy up to 70% of nigh-on any Euro-denominated bond in issue has the potential to remove what few constraints do still remain in force. Nor will it take much for a careerist Bank of England leadership to participate in the mania should the UK data come up tails, rather than heads, for a long enough stretch. Heaven only spare us that the current mild deceleration in the United States trips some invisible threshold and prompts the Fed, too, to yield to what increasingly seems like our inescapable doom.
Absent the central bank's acquiescence in their reduction, it must be underlined that the sum of reserves it chooses to force upon the commercial banks can never be diminished, but only turned from excess ones into those of the required kind. This, however, can only be done if the banks can create enough new eligible liabilities on their balance sheets – demand accounts for the greater part – through the granting of new loans and the making of securities purchases. But, today, this would have to be done on an unattainable scale given the exiguous nature of reserve requirements themselves, the enormity of those reserves' current surplus, and the operation of other constraints on banks' expansion, especially those relating to capital adequacy.
In the circumstances, to charge negative rates on the same reserves which the programme of quantitative easing has foisted upon them is, as your author pointed out more than a year ago, to impose a tax on the very banks whose restoration to health has been the stated aim of policy. Worse, it is also a direct threat to the very architecture of monetary transmission upon which modern society relies. Indeed, as a crude, undemocratic, extra-parliamentary levy on both transactions and savings, NIRP can have few parallels in the modern, representative state.
As some dim, belated realisation of the policy's malign side-effects upon the banks has dawned upon him and his clique, Draghi has lately performed a near-unrivalled act of Mad Hatterism in declaring that he will now pay banks to lend, as well as charge them for harbouring the fruits of those loans in the form of reserves! Though the narrow logic behind this step is unimpeachable, the truth is that it is simply the latest in a long series of highly dubious countermeasures which represent nothing less than the successive overturnings of the various pillars of traditional practice and good common sense whose function it is to hold up the monetary Temple itself.
Though not the first such enormity, this latest procedure does mark a new nadir, however, for even as it serves further to impair the fundamental economic role of the commercial banks, it offers them untold scope for both ethical abdication and outright pecuniary corruption. Lend – no matter how much, on what terms, or to whom – and we will reward you out of our robbers' pile of inflation-cum-seigniorage spoils for so doing, is the message. Moral hazard, anyone? Malinvestment? Misdirection of funds for much more venal purposes?
All in all, this intensifies the Keynesian drive to extirpate the rentiers, to turn over the tables of the usurers, and to promote an even greater substitution of fictitious capital and ex-post forced-saving for the genuine, ex ante, voluntary kind we so lack. But to do this on such a scale in a system still so enervated by the losses which the same discoordinating mechanism inflicted in the last cycle is surely the equivalent of bleeding a badly-injured patient in the hope of balancing his humours and so bringing him back to health.
Furthermore, as is being made very plain, our overlords are all too aware that we stubborn serfs have an irritating tendency to do whatever we can to minimize the unwelcome effects of their diktats upon us. Thus they stand ready not only to impose ever more arbitrary restrictions upon our liberties – measures they euphemistically call 'macroprudential' regulation – but they have recently launched one of their concerted, Open Conspiracy propaganda campaigns with a view to softening up resistance to a coming criminalisation of the use of cash and thence to closing off yet another escape route from their exactions.
How can you dissent, we are told? Are not the main users of bank-notes drug lords and terrorists, people of whom we would all gladly be rid?
No! Actually, we – the law-abiding masses – are the main users of this unobjectionable medium of exchange and, as you well know, M'Lord, any claim to the contrary is a straw man of the most obvious kind. The zero-point-zero-something percent of bad guys among us also use airline tickets and anoraks and after-shave when they are on their way to perpetrate their thankfully rare misdeeds: are these to be either banned or subjected to ever closer, more intrusive, more Orwellian scrutiny under the false pretext of prevention, too?
But of course the reason for the vilification of cash lies not in some sudden heightening of our masters' paternal concern for our safety. It is simply that our continued access to the folding stuff is almost the only thing preventing them from taxing our money much more heavily and that the obstruction of that access will relieve our currently fearful retail bankers of the main impediment to the pass-through of the burden of negative rates to us, their already disgruntled customers.
The day that dreadful prohibition comes into force, you can be assured that the ECB and its peers will not be overly shy about driving such rates further and further downwards into the very Pit of monetary horror.
Given that the law is almost silent on such matters – its framers never having foreseen such a purposeful drive to inflict economic violence upon us in this way – the increasingly hubristic and huffily self-exculpatory council members who do Draghi's bidding will loudly condemn any calls for them to desist from their programme as being an illegitimate encroachment on their duty to respect their sacred 2% CPI 'mandate', no matter how inappropriate that goal has become nor how hitherto unconscionable are the actions they take in its pursuit.
Who after all, in the sorry political dystopia that is the EU, remains to stop this dreadful, rogue institution from doing its will and its will alone? Who will say, as Bismarck once did, "Seien Sie ausser Sorge: nach Canossa gehen wir nicht!"...? [Have no fear, we will not go to Canossa!]