(Source: finanzmarketwelt.de, Caption by the Author)
When Mario Draghi became ECB President, the Germans wanted him to become more German for fear of him destroying the value of their currency. They even gave him a pickelhaube to wear. Evidently it fitted him better than they thought. How ironic, that in retirement he has indeed become more German by embracing the new German manifest destiny to destroy the value of their currency.
Perhaps it is the Germans who have become more Draghi of late. In fairness, not all Germans are on board with this new economic metamorphosis; but they don’t count right now since they are still at the conspiracy scale and the German recession is getting all their headlines. This is not the kind of manifest destiny that the Old Guard of sound money interests desires. Another Beer Hall Putsch is being planned by them this Oktoberfest.
Those who manufacture German products have always hankered-after a weak currency, to boost their exports, ever since the days of the Weimar Republic. Such hankerings have inevitably been followed by something nasty and then remorse followed by a brief devotion to a hard currency. The passion for weak currency is what drove Germany into the Eurozone in the first place; and this is again what being German is all about right now in these current times of trade wars. Perhaps this is what Eurozone economic and political union is all about also. Maybe it will all end peacefully this time around. And then again, if history rhymes?
The last report suggested that Mario Draghi and Germany were nudging and dragging the Eurozone closer to an experiment with MMT. Draghi has now finally confessed to this and both his critics and his fans have confirmed it.
(Source and caption by the Author)
The last report also noted Mario Draghi’s and Christine Lagarde’s plan for forcing through their agenda of monetary policy easing combined with fiscal policy expansion. Their strategy involves assiduously applying the ECB’s single mandate and the current undershooting of this mandate’s inflation target. In their view, such application and undershooting combine to justify more monetary and fiscal stimulus.
(Source: ECB, caption by the Author)
Mario Draghi’s recent and last testimony, to the EU’s Committee on Monetary Affairs, clearly demonstrated this strategy and its tactics. Draghi talked up the continued undershooting of the inflation target and the expectation that this will continue. He also talked up the need for the EU to speed up the pooling of fiscal resources, in order to finance fiscal spending with pooled deficit financing bonds. His greatest deviation from reality was his inference that somehow the decision taken at the last Governing Council meeting was unanimous. The level of veracity to which he sunk, in order to create this impression, scaled the heights of his creativity.
Draghi totally ignored the challenge from the Hawks, led by Austria’s Robert Holzmann; who now want to close down his tactics by getting the inflation target lowered to one that the ECB can comfortably hit without more monetary policy easing.
(Source: ECB, caption by the Author)
Amusingly, Draghi turned the Hawks’ words on their head; by stating that there was in fact a Governing Council “unanimous consensus” in support of a fiscal stimulus from elected policy makers. For lack of consensus on monetary policy, read “unanimous consensus” on fiscal policy. A consensus is a consensus, even though it is in relation to something very different over which the ECB has no control!
(Source and caption by the Author)
Finally, the moment arrived when Draghi played his MMT card. Extemporizing, as if he has never really considered it before, he slipped his MMT card into a pack that he collectively presented as policy stimulus ideas that should be discussed. Whilst admitting that MMT steps over the line into fiscal policy, he still believes that it has merit.
The reader should remember that in the last report, Executive Board member Benoit Coeure emphatically stated that the ECB has the integrity and internal processes in place to prevent it from being an agent of fiscal policy. Coeure’s prescience is by design; and is an intricate part of the process by which MMT will be nudged into existence. He has simply presciently ticked the box to prove that the ECB can engage in MMT without breaking the prime directive on monetizing fiscal deficits.
(Source: Bloomberg, caption by the Author)
With such a recommendation, from such a trusted establishment figure as Coeure, one can now be sure that discussion of MMT will find its way into the monetary policy framework review this year. Similarly to Draghi, Lagarde will claim that she has not considered MMT until Draghi mentioned it. Nobody should be fooled by this charade. The intention and capability to deploy MMT have been there for some time. Lagarde’s succession of Draghi has enabled execution of the strategy.
Having dropped the MMT bomb, Draghi then sought to neutralize its detractors thereby smoothing its adoption. He did this indirectly by calling on the Hawks to stop resisting, in the interest of Eurozone economic health. He frames their resistance as an economic headwind, by preventing the ECB from executing its easing agenda. Thus framing the Hawks as a headwind, Draghi has put them momentarily on the back-foot. As they are recovering, he and Lagarde can nudge their agenda further along; so that its momentum becomes difficult to slow.
Draghi’s call to the Hawks was answered by Sabine Lautenschlaeger’s resignation from the Executive Board. The resignation symbolizes three things. Firstly, it shows that Draghi has no consensus mandate to do what he is doing. Secondly, it shows that he will win because the resistance is leaving the field of combat. Thirdly, it signals that the ECB has lost all credible commitment as an independent central bank. It is now viewed as a fiscal and political agency, which is there to monetize and thereby enable fiscal policy.
Lagarde has wasted little time taking up Draghi’s batons. She swiftly seized upon global trade as the greatest threat, as she placed her monetary calling card in the public domain with CNBC. The choreography of the seem-less transition from Draghi to Lagarde is a well-oiled machine.
All that is needed is for some tame journalists and Mr Market to attribute the economic headwind to the Hawks, in the form of headlines and negative price action respectively. Once caught by this halo, the Hawks will have to face the fact, that the more they resist in fact the greater the monetary policy stimulus that they will beget. One of the French Hawks has already had this epiphany; and is therefore trying to squirm free of being tarred by the brush that is painting him.
In the last report Preudhomme Villeroy de Galhau was noted as blaming President Trump for the ECB being forced into easing against his better judgement. Villeroy maintained his reluctant Hawk posture once again. This time he is pushing back against the ECB unleashing all its package of easing moves that were displayed at the last Governing Council meeting. He does not see the urgency to deploy more QE at this point in time. For him, the latest interest rate cut and strong forward guidance are sufficient. He may also have noted that the current Capital Key limits restrict the ECB’s ability to deploy large volumes of QE buying in any case.
Evidently ECB Vice President Luis de Guindos is in on the MMT conspiracy, judging by his latest comments. His take on tiered NIRP mitigation, is that it is a necessary enabler of the next phase on monetary policy easing. He also took a shot at the Hawks by way of the Phillips Curve. Conflating tight Eurozone labor markets with continued weakening inflation, he concluded that the pass through dynamic to wages is structurally broken. In his own words: “our tools don't work and our view of how inflation works was wrong.”
De Guindos’s new solution is not just further monetary policy easing. He wishes to combine it with fiscal and structural economic policy aimed at the pass through. The combination of monetary and fiscal policy is elementary MMT. He must be careful however, to blame the failure to understand how inflation works on the Hawks going forward. Accepting the blame destroys his own credibility and also that of his MMT solution. Who is to say that he has understood inflation correctly this time? There is no control sample economy of MMT to prove that it works. Japan is arguably the nearest thing and the results remain inconclusive at present.
ECB Chief Economist Philip Lane has been noted as a key man in the MMT conspiracy. It is his job to fertilize the intellectual ground, with speeches and data, so that MMT theory can grow into policy. His key enabler is the creation of Safe Bonds, which effectively pool fiscal resources of the Eurozone into securities that the ECB can monetize without the constraints of the Capital Key rules.
(Source: sharetv, caption and editing by the Author)
Lane’s latest mission took him, way behind enemy lines into Germany, to place a classical disinformation story in the public domain. Talking to Handelsblatt, he ventured that the latest Governing Council decision “was not such a big package”.
(Source and question by the Author)
Lane also took pains to stress that the newly adopted tiered NIRP mitigation was implemented to safeguard the monetary transition mechanism; and not to favor any particular banks as this author suggested in the last report. Understood!
(Source and question by the Author)
Evidently, the criticism is getting to Lane. He still needs to be a little more forthcoming on the subject matter of the timetable for Safe Bonds though, if memory serves correct.
With further linguistic dexterity and mendacity, Lane can later say that since it was a small package a much bigger easing package of longer duration will be needed. For now however, his tactical objective is to assuage Germans who are worried. Maybe he should also get himself fitted for a pickelhaube to improve his disguise and the delivery of his message.
(Source: ECB, caption by the Author)
Lane has a team of agents working alongside him, to produce disinformation in the form of academic research. On the latest occasion, they dug up the bones of Walter Bagehot and asked them to divine how big the ECB’s balance sheet should get. Allegedly, he answered that it is unlimited when "the brave plan is the safe plan." For Bagehot’s “brave plan”, read Draghi’s “do whatever it takes”. The team’s black propaganda theorizes that “the Eurosystem was able to remove excess risk from parts of its balance sheet by extending the scale of its operations”. Said scale of operations is QE on the ECB’s balance sheet. By inference therefore, the bigger the risk then the bigger the balance sheet should be.
Governing Council member Ignazio Visco, in a similar manner to Lane, injected a further element of cynicism into the forward guidance tool. According to him, the decision to enact the latest package of moves was not made in haste. He would like his audience to believe that it was debated at length and then moved ahead through consensus. What in fact he has signaled is that there was a conspiracy all along to pull this stunt; and that those who were not in on it reacted with shock and horror at both the audacity and the mendacity of the move.
The prize for cynicism must go to Christine Lagarde. In a Bloomberg TV kiss-and-tell-all she alleged that, far from being involved in an MMT conspiracy, she had to be dragged kicking and screaming into the ECB Presidency. This just doesn’t fit her carefully scripted speeches on the subject and what she would do if elected, before she was allegedly press-ganged into taking the job. She most certainly promoted her skills and flagged her agenda well in advance. In addition, her pathway was paved by the very effective elimination of all other deserving candidates; so that the press effectively made her into the sole candidate for the role. The whole thing was a lay-up. Trying to climb to the moral high ground, which she so badly needs to drive through her agenda, she then opined that her sense of duty and the dire threat to the global economy obliged her to accept the job.
The tyranny of the significant minority, of small Eurozone country Governing Council members, was noted in the last report as being of critical importance to Mario Draghi getting his own way. This was recently illustrated by the rush to defend the last decision by Peter Kazimir. Kazimir disingenuously conflates majority voting opinion with the word consensus. He believes that this majority voting decision has now put the ECB ahead of the curve. If it is ahead of the curve, does it need to act as aggressively going forward therefore?
The last report noted that an elite chosen few of the Eurozone’s banks will be able to avail themselves of NIRP mitigation. The rest were expected to put up such a fight that the ECB will be obliged to extend mitigation to them. This fight has begun. Inter-bank lending actually tightened and some interest rates actually increased, whilst the ECB was cutting its benchmark target rates. Mitigation is begetting tighter liquidity, as the chosen few refuse to pass on their benefits to the non-chosen.
The clogging of the private credit creation process, in the banking sector, also goes some way to explaining why the MMT conspirators so ardently desire fiscal spending to accompany monetary policy easing. Profligate governments can always be relied upon to spend on the real economy, since their popularity depends upon it. Bankers will do what is best for their compensation schemes. The lesson learned is that too much QE has ended up in financial assets. This time around, the MMT spinners want more of it to stick with people who vote. Populists have capitalized on this diversion of wealth, now it is time for some re-balancing. Eurozone voters are about to get carpet-bombed with fiscal stimulus. They will not however be burdened with higher taxes, because this fiscal debt-can will be kicked onto the ECB’s balance sheet and then kicked way on down the road into the future.
(Source: thefederalist, editing by the Author)
High asset price valuations thus appear to be mitigated to some extent, by real economic activity, so that the MMT stimulus appears to be more balanced. Nothing could be further than the truth, when the fiscal stimulus is being financed with negative interest rates courtesy of the central bankers. The hyperactive real economy is being driven because it gets paid by the central banks to hyperactive. The economic boom and the asset prices that it allegedly sustains are therefore totally spurious in the large part. When Greta Thunberg figures this one out, she will say more than just “how dare you!” If the MMT conspirators are wise, they will spend heavily on green projects to avoid being called out by her.
One place to look for profligate fiscal spending is in the former East Germany. As the nation prepares to celebrate thirty years of unity there is little to celebrate. The latest State of Unity report finds that the majority of East Germans feel like second class citizens. Money spent on immigrants has doubtless suggested to them that they are third class citizens; hence they are now marching under the AfD banner as opposed to the old Swastikas of the past. The German government has belatedly taken interest in its abandoned Eastern provincials.
(Source:taz.de, caption by the Author)
The last report observed that Germany was looking to finance fiscal spending through off-national-balance-sheet SPV’s. Readers old enough to remember the “Treu-hands” that reached out to the East will not be surprised to see the new SPV’s cast in this mold. Readers old enough to remember the Marshall Plan will also note similarities in the new SPV’s. Needless to say, East Germany is going to be the recipient of massive SPV funding. This could be just like throwing good money after bad; if the insiders and speculators get in there and divert the funds away from the intended recipients into their own grandiose schemes as they did after unification in 1989.
Germany’s Eurozone neighbors will demand the same rights to unify the Eurozone Project, with SPV’s and off-balance-sheet solutions of their own, or they will threaten to quit. The bubble-mushrooms in East Germany will thus spring up all over the Eurozone in due course. MMT should be renamed Monetary Mushroom Theory. It grows in dark places and is covered in large amounts of the proverbial.
(Source: investorvillage, caption and editing by the Author)
Mario Draghi’s ringing endorsement from a former Bundesbank President, is the kind of ringing endorsement that will make Sabine Lautenschlaeger’s resignation easily forgotten. Axel Weber, now Chairman of UBS, said it is time for Germany to fiscally spend. He also noted pointedly that Draghi’s call for German fiscal stimulus had great merit.
The irony continues, if one remembers that Weber resigned from the ECB in protest over the QE buying of the fiscal basket cases. Weber is having his road to Damascus moment, although it must be emphasized that he has not reached the new Rome of MMT yet. He is however becoming more Draghi. This will shock a group of dissident conspirators who would have been hoping that he would have gone the other way.
There could be a board seat for Draghi over at UBS at the end of the day. UBS has practically become a hedge fund in response to the Swiss National Bank’s move into the new world of NIRP. As Chairman of the bank, Weber can hardly bite the hand that feeds him generously, by criticizing unconventional monetary policy. Having thus conflicted himself, by capitalizing on unconventional monetary policy, it is thus a tiny step for him to embrace MMT when the time comes and the P&L demands. The least that Weber can do is to reward Draghi, with some cushy non-exec position, in recognition of the ECB’s contribution to UBS’s bottom line and his compensation.
(Source:izquotes, caption by the Author)
Ever the political survivor, Chancellor Merkel has let others jump over the MMT Cliff before following. Like Weber, she now opines that Draghi is a rational actor and that her country must enact fiscal stimulus.
Whilst Jens Weidmann agonized over his monetarist sturm und drang, the Bundesbank’s Vice President Claudia Buch embraced the MMT and NIRP zeitgeist on behalf of the central bank. In doing so, she gave her chances of replacing Weidmann and one day succeeding Lagarde a massive boost.
Buch blamed the German banking system’s antediluvian protectionism and sense of entitlement for its problems and not NIRP. Stale business models and anachronistic revenue models are squarely to blame in her opinion. As with the auto-sector, the German banking sector is getting tough love from its former protectors. One senses that the banks are being told that NIRP and MMT are here to stay and that Germany cannot stop them. German banks must now adapt to survive.
(Source: onlybootleghere, caption by Oasis)
Lacking the moral compass and guts to resign on principle, as Sabine Lautenschlaeger did, Jens Weidmann simply lowered the tone and descended into the ugly world of a personal attack upon Mario Draghi. Weidmann criticized Draghi’s dictatorial style which avoided debate and ruled by decree. Clearly, this criticism is designed to warn Lagarde not to follow suit. Observers will note that Weidmann did not have the integrity to resist while it was all kicking off.
(Source and caption by the Author)
To be fair to Weidmann, his criticism did extend to the substance of Draghi’s thesis and not just its messenger. Weidmann warned Draghi and hence Lagarde by default not to tinker with the Capital Key limits on ECB bond buying. It has been noted throughout this series of articles, that an attempt to bend these limits is needed in order for the ECB to deliver on Draghi’s promise to expand QE. If this attempt fails, Lagarde will thus be heavily reliant upon Philip Lane getting pooled Eurozone Safe Bonds through the Eurozone’s body politic.
Weidmann has effectively identified himself as a card-carrying CDU stooge. The CDU recently re-affirmed its pledge to “Black Zero” fiscal policy. This is enshrined in the constitution, although the Social Democrats have suggested ways and means around this through off-balance-sheet special purpose vehicles. This is going to be the main issue on what is sure to lead to new elections in Germany. As the economy weakens, the chances of the CDU surviving are diminishing. Weidmann may thus ultimately go down with them. At least he intends to do so fighting this time.
(Source and caption by the Author)
Weidmann’s plan may backfire however. A previous report noted the German cunning plan to sneak its fiscal stimulus off-national-balance-sheet into a form of agency SPV’s. This is arguably in total breach of the Eurozone’s rules on deficit financing, so Weidmann’s moral high ground in Germany is being leveled by his own political masters.
In that report it was suggested that the other fiscally constrained Eurozone nations would bend the rules, citing Germany’s fuzzy accounting as the precedent. Italy has already started this bending and has suddenly found the ways and means to unfreeze an extra 1.7 billion Euros of fiscal stimulus, that had been originally frozen to avoid sanctions for fiscal transgression. The Eurozone rule levees are breaking and the fiscal floodwaters are seeping through the cracks.
(Source: Amazon, caption by the Author)
Not all former Bundesbankers have adopted Axel Weber’s pecuniary self-serving tactics of supporting Draghi’s actions. As the tide of QE and MMT liquidity rises, so does formalized resistance to it. Initially this resistance crystallized around the figure of Austrian Governing Council member Philip Holzmann. It has now formalized as signatories to a document that defines its intentions and capabilities, in a similar capacity to the signatories to the declaration of the Henry Jackson Society. The founder signatories include those of both Hawkish and Moderate persuasions.
Like the Jackson declaration, this new movement vows to the fight tyranny and oppression of monolithic regimes in order to promote freedom and democracy. It seeks to do so by upholding the right to earn interest of the Rentier Class within the European polity. It thus purports to save capitalism itself. One senses that this will in time become a powerful sound money party, within the Eurozone itself, which transcends national borders. Ultimately, it will become a tyranny itself therefore. For now, its ranks are growing and it is biding its time for a putsch, before hyperinflation threatens the foundations of the Eurozone and the ECB building in Frankfurt is in flames. It all sounds a little familiar.
(Source and caption by the Author)
Holzmann, the putative putsch leader, added more intellectual rigor to the cause with his latest guidance. He identifies what this author calls “destructive creation” as the greatest flaw in the QE/NIRP/MMT package that Draghi and Lagarde hope to force through. In his view, this package proliferates and keeps zombie enterprises alive when the down-phase of the business cycle should be creatively destroying them in Schumpeter’s words. On aggregate, the resulting business cycle expansions lack any strength or relevance. His solution, of cutting the inflation target to circa 1%, would therefore reduce the monetary forces of “destructive creation” that the ECB could deploy in the name of disinflation fighting. Holzmann needs to be careful.
It will be very easy for Draghi and Lagarde’s verbal casuistry to frame Holzmann as a defeatist. His idea of cutting the inflation target needs to be clearly given the context; that it is impossible to achieve because aiming to hit it at 2% has created overcapacity. Just saying, that it is impossible to hit the 2% target, sounds like defeatism that stands in stark contrast to the “do whatever it takes mantra” that is winning hearts and minds currently.
(Source: Godfather III, caption and editing by the Author)
Mario Draghi is now spending his immediate retirement framing the poisoned-chalice that he has passed to Lagarde, in a way that does not kill her whilst imbuing his own legacy positively. The Financial Times leaped at the opportunity to allow itself to be used to exonerate him. He thus conflates Lagarde’s future success with his own airbrushed posterity.
Draghi’s first act in this performance is to blame the disinflation problem on external factors; namely the American engineered trade war and global economic slowdown. Secondly he embraces the symmetrical single inflation mandate, which it is undershooting, as the catalyst that has forced the ECB to react to external factors. Thirdly, he places deeper fiscal and economic union as the solution to all the Eurozone’s problems. Fourthly and somewhat cheekily, he says that a fiscal expansion will allow the ECB to raise interest rates sooner and quicker. Finally, he presents Brexit as the next external agent and catalyst that it will fall to Lagarde to react to. Having pre-committed her career decisions, at the last Governing Council meeting, he can then later claim that her future actions will have somehow vindicated his own decisions whilst in office.
A cushy board seat at a Northern Eurozone bank is highly unlikely for Mario Draghi in the future. Santander Chairman Ana Botin describes negative interests as the “biggest disruptor” of the Eurozone banking system. She believes that the outcome will not be pleasant for the majority of them. The Eurozone public is hardly likely to shed a tear though, therefore neither will those politicians whom they vote for. If Draghi thought the Governing Council Hawks were bitter, the commercial bankers will be even more atavistic towards him.
It’s unlikely that Draghi will get a cushy board seat in the insurance sector either. Oliver Bate, the CEO of Allianz joined the Draghi arse-kicking competition. Bate’s criticism extended beyond NIRP to MMT itself and Draghi’s nudging of it. According to Bate, there is no need for fiscal expansion, because Draghi is already “making it easy for people to spend money they don’t have”.
If Lagarde is watching, she will take note that there is resistance in many sub-sectors of Eurozone Holdings Inc. Her main supporters will come from Eurozone Manufacturing Inc., so no doubt she will play to this gallery. Playing to this gallery has the obvious advantage of addressing the current trade war narrative also.
Unsurprisingly, Draghi’s fellow countrymen are offering him a cushy sinecure board seat in posterity. Nepotism, along national lines is after all the hallmark of the Eurozone. The offer comes courtesy of Frenchman in this case; which signals how France hopes to clean up where Germany fails. Jean-Pierre Mustier, the CEO of UniCredit, makes Draghi’s sinecure conditional upon the Eurozone banks being allowed to charge depositors negative interest. Italian banks thus intend to trigger a banking run and hence further headwind to economic growth, in order to protect their compensation models.
It’s not the first time that the Banksters have put their commercial priorities above the economy. Nor will it be the last, until they are bailed out and ultimately nationalized. As long as they get paid the big bucks, even ultimately as civil servants, what do they care? Economic rent-seeking doesn’t just stop, because interest rates are negative, it gets more creative. Look how much central bankers get paid these days for simply printing money. The more they print, the more they can get paid. What’s not to like?
Lagarde for her part has embraced Draghi’s legacy. By doing so, she has moved even closer to her characterization as out of touch Marie Antoinette to Draghi’s omnipotent Louis XVI. Feigning blissful ignorance, of the pitchforks pointed in her direction by some Governing Council members, she opined that a difference of opinion is a good thing. Apparently, it is always good to talk. The problem with this speech, is that Draghi’s and her own despotic tendencies appear to be riding roughshod over those who she allegedly loves to talk to.
Noting the challenge to the ECB’s demands for fiscal stimulus, “Rehnfeld” has swiftly moved onto the counter-offensive. He did so by opining that there are limits to the impact of QE, at the Zero/Negative Bound, when inflation remains subdued.
“Rehnfeld’s” move was reinforced with logistical support from ECB Vice President Luis de Guindos. From his vantage point, de Guindos noted that the desired change to the Capital Key is under attack from the Hawks. His response was to go around this obstacle, by verbally nudging for a common Eurozone fiscal budget, thereby making the Capital Key limits redundant. Said pooled fiscal stimulus allegedly will avoid the “Japanification” of the Eurozone. Just for good measure, he then gave-it the big nudge, by suggesting that Mr Market was under-pricing a Hard Brexit outcome.
Subliminally, in Mr Market’s mind therefore, deeper Eurozone fiscal integration and fiscal stimulus now conflate with a Hard Brexit. Draghi’s earlier prescience, about the Brexit challenge, now permeates the market discounting mechanism that directly feeds back into monetary policy making fait accompli.
(Source: flashlyrics, caption by the Author)
Governing Council member and monetary policy influencer for Italy Ignazio Visco, is done with all the pussyfooting around on MMT. He calls a spade a spade, or rather in this case says "deflationary risks are not acceptable in the situation of high private and public debt." Ergo, debt monetization is acceptable when deflation threatens and everybody including government is insolvent. His thesis practically deals with the present at the expense of creating future chaos.
But as the Italian’s sing, “Domani never comes” when one kicks the debt can down the road onto the ECB’s balance sheet.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.