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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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  • Is There A Chance For A "European Spring"? No.

    "Mr Tajani said the crisis is compounded by the tight monetary policy of the European Central Bank, which has failed to alleviate a serious credit crunch for small firms. 'We need a real central bank, like the US Federal Reserve or the Bank of England, willing to promote growth,' he said, in an unusually blunt criticism of a fellow EU institution.

    Guy Verhofstadt, leader of the European liberals, said it is time to broaden the ECB mandate to include growth, warning that the eurozone is at risk of chronic stagnation and a 'Japanese winter' unless the central bank goes beyond short-term measures."

    --Ambrose Evans-Pritchard, Daily Telegraph, Sept. 8th, 2013

    A little background: Antonio Tajani, the EU commissioner for industry, is an Italian politician close to Berlusconi which in eurospeak makes him a "liberal". (In Europe, liberal means capitalist.) Guy Verhofstadt, a former prime minister of Belgium, heads the liberal faction in the European Parliament. He is touted as the next president of the European Commission. It sounds like both of them are reflationists.

    I wrote previously that, if an uprising ever comes in the eurozone, it would have to come from the left, except for the fact that the European left doesn't understand monetarism. Maybe I was wrong. Not about the left being ignorant of monetarism, but about the right's embrace of deflation. There are now stirrings of reflationism on the right, which is potentially good news for unemployed and/or starving Europeans. If the right starts openly pushing against austerity and deflation, I have little doubt that the left will jump on the bandwagon. The left has never had its heart in Austrian economics.

    The Social Democrats' problem has been their desire to maintain credibility as a responsible governing party, and to be seen as as willing to make "hard choices" even if it hurts workers. The socialists' ignorance of monetarism has left socialists such as Francois Hollande with the false choice between austerity and utter collapse. In the US, respected left-wing economists such as Paul Krugman and Joseph Stiglitz can call for fiscal and monetary stimulus with impunity, but there is no such freedom on the left in Europe. In today's Social Democracy, to advocate inflation is a personality disorder, or crypto-communism. Wealth confiscation, government defaults, bank failures: yes! Reflation: no. Eat your gruel.

    It looks like the eventual leadership of the revolution against austerity and deflation will come from the right. Perhaps this is not so surprising, considering that Sarkozy, Berlusconi and Rajoy have criticized the "hard euro" policy in the past, and that the new head of the BofE is a closet inflationist. Hard currency is not a tradition in Latin Europe, nor in Anglo Europe.


    The challenge for Europe is whether these murmurs can be forged into an outright revolt, as opposed to banter at the kaffeeklatsch. Europe needs a statesman like William Jennings Bryan who understands economics and can forcefully articulate the need for a revolution before it is too late.

    But I think it is already too late or, rather, that the cause is hopeless. Let me explain why:

    1. Fear of Germany

    Europe has an irrational fear of alienating Germany. Aside from the small matter of 20th century history, the fear emanates from the fear of being "cut off" from the German Treasury. In other words, the fear of not getting bailed out. What is irrational about this fear is that Germany has already decided to cut off the rest of Europe. Weidmann's "No Bail-Out Principle" means no bailouts.

    2. The Single Mandate

    It will be difficult for the revolutionaries to get control of the ECB as long as its mandate is unchanged. To change the mandate will require treaty revision, which is next to impossible so long as Germany is in the EU. It is true that, if the ECB board were to vote to reflate, that could be an end-run around the mandate, but Germany would object.

    3. ECB Independence

    Even if the reflationists win political control of the EU, that does not change the independence of the central bank. New governments could appoint doves to the ECB board, but that would take years. At present, board members are prohibited from taking direction from their home-country governments. They do not represent their home countries, unless they are German.

    While I would like to convince myself that there could be a light at the end of the eurozone tunnel, I really doubt it. It will take a lot more than a few off-hand comments to the Telegraph to make a revolution. It is deeply ironic that the Italian left succeeded in destroying Berlusconi, the only man who could have saved Italy from becoming Greece. And ditto for France, which rejected a right-wing reflationist (Sarkozy) in favor of a left-wing austerian (Hollande).

    I'm not going to hold my breath waiting waiting for a European Spring.

    Sep 09 10:40 PM | Link | 1 Comment
  • Draghi's Satanic Mandate
    "Q: Is the ECB reflecting on the fact that, with high debt and countries coming out weak from recession, a mid-term inflation target is not enough to get out of the crisis; and that there are some economists who suggest that you should also link it to unemployment, as the Federal Reserve System does?

    "Draghi: The answer to the question is pretty straightforward. Our mandate talks about price stability and that is our objective: price stability in the medium term."

    --ECB press conference, Sept. 5th, 2013

    What is the object of economic policy in general, and of monetary policy in particular? Wouldn't you say prosperity, or wealth-creation, or an employed workforce, or an economy operating at full potential? Economic policies in modern capitalist countries are supposed to create the conditions for sustainable long-term growth, as opposed to civil war or revolution.

    In the US, this is a matter of law. The Full Employment Acts of 1946 and 1978 require the federal government to "promote maximum employment, production, and purchasing power." They provide the Fed with its dual mandate. Given what happened in the US during the 'thirties, it is understandable that Congress decided to outlaw another depression. And the law has worked. Because of it, the US hasn't experienced a Second Great Depression.

    In the US, there is almost no debate concerning the objects of monetary policy. All economists, whether on the left or right, are supportive of the dual mandate. It is not a topic of debate. How could anyone seriously argue that high unemployment and low growth are desirable?

    As we know all too well, Europe decided that, instead of outlawing depression, it would outlaw inflation. Or, to put it less charitably, Europe made a very stupid policy decision, which is that price stability alone would create the necessary conditions for prosperity. In other words, a full employment mandate is unnecessary because price stability will create full employment.

    What is amazing is that even though the ECB has successfully delivered price stability from the day of its founding, for some reason full employment has not resulted. Whatever could be wrong? What is wrong is that it is impossible to have 4% real growth in a context of 1% nominal growth. Nominal growth sets a ceiling for real growth, since deflation and growth go together like arsenic and good health.

    Does Mario Draghi believe that 1% inflation will address the eurozone's 12% unemployment, or its spiralling government debt ratios, or its banks' toxic loan portfolios? No, he doesn't. Let me give you my take on Draghi: he's the Clint Eastwood character in those 1970s spaghetti westerns. He's a hired gun. He was hired to deliver price stability, and that's what he's delivering. He wasn't hired to deliver full employment; if you want that you'll have to amend his contract and pay him extra.

    If Draghi were to mention the European depression at a board meeting, the Germans would shout him down. Or perhaps I should say, when Draghi mentions the depression at board meetings, the Germans shout him down. He has mentally compartmentalized his job description, such that he feels no pangs of guilt when he reads about people eating out of trash bins. The sin is not his; it is Europe's.

    If Draghi had written the ECB charter, it would have included full employment. But he didn't, so like Eastwood, he just hangs 'em high.

    Sep 06 11:55 AM | Link | Comment!
  • Europe's Depression Is About To Get Worse

    Thesis: Eurozone growth is about to turn sharply negative because credit growth has turned sharply negative.


    Can an economy grow when credit is contracting? I really don't think so. Credit growth in Zonal Europe is now sharply negative. Here are the stats as of June, courtesy of the excellent Market Daily Report:

    EZ: (3.5%)

    Ger: (6.3%)

    Fr: (1.1%)

    Belg: (3.0%)

    Neth: (1.0%)

    Aus: (5.6%)

    Fin: (4.4%)

    It: 0%

    Sp: (9.3%)

    Ire: (13.2%)

    Gr: (20.4%)

    P: (4.7%)

    Cyp: (17.0%)


    A plot of EZ credit would look like the trajectory of an airplane which takes off, achieves cruising altitude, and then runs out of fuel: a scarey parabola. The inflection point, or Minsky Moment, occurred this winter. Something happened which resulted in a decline in zonal credit; I don't know what it was.

    But now zonal credit is declining--not the growth rate, but the actual stock. A credit contraction always and everywhere results in negative economic growth. I don't see how the eurozone can avoid an acceleration of the double-dip recession that began at the beginning of 2012. I'll be honest: I expect zonal credit to contract for the next decade. It will take at least that long for the European banking system to digest its Matterhorn of toxic waste. The banks will have to simultaneously charge-off bad loans, mark government bonds to market and raise capital--in the face of declining core profitability. This is the definition of a debt-deflation depression.

    May I remind you of the eurozone's official strategy: (1) weak banks should be allowed to fail; (2) weak governments should be allowed to default. This predicts that the weak zonal governments (the PIIGS) will default, and that the weak zonal banks (of which there are many) will be allowed to default on their bonds and deposits. That's a death-spiral: market prices will decline, especially the price of labor, while the real value of debt will rise. A repeat of the whole 1930-33 thing, which we know all about.

    It is almost as if the entire product of the economics profession since 1933 has been erased. We have learned nothing. We will once again experiment with liquidationism. Prices fall and real debt grows until it is extinguished via default. Why not do it again? Maybe it will turn out differently this time. Perhaps the laws of economics will suspend themselves for the benefit of the European unemployed. Maybe this time starving people won't turn to political extremism. I am reminded of Christopher Hitchen's aphorism: The connection between cruelty and stupidity is very close.

    My advice: Keep your eye on the DMB's eurozone credit growth statistic. Should it continue to decline, as I predict, we will enter Phase III of the eurocrisis. I would not own any security denominated in euro.


    Tags: euro, europe, eurozone
    Sep 05 11:18 AM | Link | Comment!
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