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ECB Q€: Much Too Much, Too Late

A few short slogans as Europe's money glut is force-fed more money...
 
IT IS ALL very well for both macro-economists and stock-pickers to look at flows, but unless a weather eye is kept on how they are being financed and what that implies for the future vulnerabilities of the contracting parties, a very important element is being overlooked, writes Sean Corrigan at the Cobden Centre in this story first published on his True Sinews blog.
 
Indeed, in the immediate wake of the collapse, Her Britannic Majesty somewhat querulously asked the foregathered luminaries of the DSGE crowd with whom she was mingling at the LSE, 'Why did nobody see it coming? The one-line answer she might have been given is because none of them have ever cared much to look at the balance sheet, since they are trained to view finance as nothing more than a conduit to be safely neglected in their thickets of unrealistic matrix algebra.
 
We should like to point out that on our Twitter account – where the compressed nature of the communications means that a certain sloganeering is not only permissible but almost de rigeur – we have adopted one or two mottos in the attempt to try to bind our monetary text-bites into a more coherent narrative.
 
One is simply, ' Abenomics fail' – shorthand for our disdain for a programme of pretending that an ageing nation of import-reliant savers can get rich by devaluing their currency and by promoting a speculative hunger for equities.
 
Another leitmotif is the ' Ghost of '37' – a reference to the widely shared folk mythology that a combination of monetary and fiscal tightening in 1937 prematurely put paid to America's burgeoning recovery from the earlier slump when in fact the proximate cause was that a new front was opened that year in the New Deal's regulatory and ideological war on 'Capital' – i.e., on entrepreneurship itself.
 
The fiction persists however that it was an instance of what we might now call 'austerity' that did it. As if it alone did not suffice to stay the policy-maker's hand, this stultifying belief mingles with the perverse incentive that while central bankers might have to endure a mild and momentary criticism of their approach if the 'controlled' inflation they so desire ever threatens to go critical, they know that they will be burnt in effigy and their memory forever accursed if they ever have the temerity to try to allow markets to function once again and any noticeable relapse in hot-house growth eventuates as a consequence.
 
Our most commonly used meme, however, is ' QEuro = 2 much, 2 late' – a blunt reference to the fact that Draghi's long-awaited Whatever initiative has arrived well after any conceivable need for it has passed; indeed, that it has come at a point where the consequences may rapidly be revealed to be almost exclusively counter-productive.
 
Just look at the GfK readings of Germans' desire to spend – now at the highest since Dec 2006. Or at the harder confirmation contained in the just-released retail sales numbers – up 5.3% in real terms yoy – or at the fact that IG Metall managed a 3.4%-plus-benefits wage rise with barely a wave of a red, 'Wir Streiken' banner needed. We shall forebear to make overmuch of the fact that the Deauville sale of yearling race-horses also set new records last month.
 
Yes, French industry may be contracting more sharply again, if we take the latest Markit survey at face value; yes, the Greeks are still trying unsuccessfully to roll that infernal rock up their Hadean hill; yes, Austrian embarrassment is intense as that captive funding arm of local political corruption – Hypo Alpe – is again making the wrong sort of headlines. But money – ever more copiously provisioned money – is beginning to burn a hole in the pockets of more than just stock market plungers and would-be real estate moguls.
 
Corporate liquidity has not been this favourable since early 2006 while households are enjoying the biggest surplus to be found in our sample. As a pairing, the private sector is back where it was eleven years ago, having worked off the entire €1 trillion cumulative deficit it disastrously ran up between the end of 2003 and the latter part of 2007.
 
As we said, ' QEuro = 2 much, 2 late'
 
Malign consequences elsewhere are already becoming evident. For example, S&P has calculated that the actuarial shortfall in defined benefit pension plans worsened by anything up to €90 billion last year (widening an already substantial gap by a quarter in one bound). The agency went on to point out – rather superfluously, one might think – that things will only deteriorate again this year.
 
Insurers also face a squeeze between their long-term liabilities – many of which carry minimum pay-out clauses well above today's nugatory bond yields – and the medium-duration assets they hold and roll in order to meet these. Despite the plaintive acknowledgement of their likely future difficulty – and who better to compute long-term probabilities than members of an actuarial industry? – they are all presently hiking dividends and raising pay-out ratios in order to disburse some of last year's one-shot gains on equities and on the 'mark-to-market' value of their bonds in a crass attempt at trying to massage their share prices upwards.

Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.
 

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