Not Quite Checkmate for the Bundesbank Germany Appears Defeated Over QE, But Might Still Dictate Terms of Surrender

This WSJ article provides an overview of the current situation – here.

64 replies on “Not Quite Checkmate for the Bundesbank Germany Appears Defeated Over QE, But Might Still Dictate Terms of Surrender”

There’s a slim chance we’ll get my preferred outcome: Germany revives the D-mark and lets the ECB become a sensible central bank, something like the Fed, with policy geared to the needs of the remaining members.

German nationalism reloaded will ensure that the ‘risks’ of QE are devolved to the nation state level further weakening the original ‘Solidarity Principle’ on which the EU was founded.

Geopolitically the EU is in freefall and being ‘gamed’ by the global financial system neocons to further dependency on US military might. The Nuland inspired breach with Russia is a major strategic capitulation by the EU, and particularly Germany and France.

Locally, the financial system branch managers in The Oireachtas do little more than capitulate on a ‘banking deal’ which remains ‘in a nietzschean state of eternally recurring moderation within the vaults of the ECB(undesbanke) …

Seasons Greetings, of a medieval nature, to all the €Z serfs!

The author goes to the nub of the matter in this extract.

“After all, if quantitative easing is purely a monetary policy operation as Mr. Draghi insists, then the ECB should buy only the safest and most liquid assets to shield itself from credit risk, leaving it to the market to bring down the interest rate on riskier assets via the so-called portfolio rebalancing channel.

On this analysis, the ECB should limit itself to buying only the safest bonds, which means German Bunds, the only eurozone government debt still rated Triple-A.

Of course, Mr. Weidmann knows that Mr. Draghi is very unlikely to accept this argument. The ECB can’t be sure that investors currently holding German Bunds will suddenly start buying Italian or Greek government bonds, bringing down borrowing costs for those countries as the ECB hopes. To do that, the ECB would need to buy Italian and Greek bonds itself, which means that eurozone quantitative easing won’t in fact be a pure monetary policy operation but an exercise in credit easing whose success depends on the ECB assuming eurozone fiscal risks.

That makes Mr. Weidmann’s second line of attack harder to counter: He says that if the ECB does embark on large-scale asset purchases, the credit risks should remain on the balance sheets of national central banks who would buy the government bonds on behalf of the ECB, rather than be pooled as is normal with central-bank assets. There is a precedent for this in the ECB’s covered bond-buying program, where the credit risks associated with individual bonds remains with national central banks to minimize the incentive to select poor credits.”

In a word; if the member governments want QE (of the right kind! – see link below), they can carry the associated financial risks.

It might be wiser to stop looking for the magic wand and knuckle down to the reform measures required.

re ; The Weidmann argument:
“That makes Mr. Weidmann’s second line of attack harder to counter: He says that if the ECB does embark on large-scale asset purchases, the credit risks should remain on the balance sheets of national central banks who would buy the government bonds on behalf of the ECB, rather than be pooled as is normal with central-bank assets. There is a precedent for this in the ECB’s covered bond-buying program, where the credit risks associated with individual bonds remains with national central banks to minimize the incentive to select poor credits.”

I would question the argument used. The ECB bought Irish bonds, made a tidy profit and distributed that profit, pronto, per the capital key of the ECB.

Can we have our profit back, given that according to Jens, we would have to suck up any losses. At a guess about 10% of Irish bond purchases 20 billion?, or approx 2 billion profit? I may not have the numbers right, but once again, Jens is looking for a change in the rules.

Frankfurt, the host of two central banks, was the hometown of Johann Wolfgang von Goethe (1749-1832), the renowned German writer, and two years ago Jens Weidmann invoked Faust, Goethe’s most famous creation, in his case against modern-day money printing.

The prospect of deflation has apparently weakened the resistance.

Weidmann suggested in 2012 that the OMT bond-buying programme proposed by Mario Draghi, ECB president, was the “devil’s work.” He said that efforts by central banks to pump money into the economy reminded him of the scene in Faust, when the devil Mephistopheles, “disguised as a fool,” convinces an indebted Holy Roman Emperor to issue large amounts of paper money.

In Goethe’s classic, the money printing solves the kingdom’s financial problems but the tale ends badly with rampant inflation. Without mentioning OMT, the Bundesbank president said: “If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” He added: “Yes, this temptation certainly exists, and many in monetary history have succumbed to it.”

Franklin D. Roosevelt said in 1932: “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”

QE will do no harm – it apparently will not be more than a half trillion – and coupled with the boost from oil prices may raise confidence but it’s no philosopher’s stone.

Chris Johns in The Irish Times yesterday suggested that the Euro Area is facing a worse scenario than Japan’s Lost Decade – which wasn’t really ‘lost’ at all.

The reality is a lot grimmer than data suggest and a recovery in Japan’s exports to China and the rest of Asia a decade ago was key to lifting growth.

The windfall gains from the plunge in the value of the yen have been mainly retained by miserly firms and cash balances amount to half annual GDP- the government will have to consider a tax on them rather than fruitlessly begging employers, as raising wages is crucial to beating deflation.

China has had a huge impact on global demand in the past decade – in 3 recent years it consumed as much cement as the US did in a century – now that it’s slowing coincident with the end of easy credit, central banks alone cannot provide sustainable prosperity.

The political protests in Hong Kong also reflect economic conditions – very costly cramped housing while beyond a few rungs down from the apex of the economic pyramid, job positions can be filled by lower cost mainlanders.

The Christmas double issue of the Economist (a great holiday read as usual) says 2015 is likely to look a lot like 1999 but a big difference is that most workers in developed countries will not get pay rises in 2015.

More here:

Economic recovery, stagnation, miserablism and miserableness

German nationalism is being overrated here.
I lean toward national and irrational fixations. Germans fear a repeat of Weimar hyperinflation in the same way that Americans fear the Gov’t will take away their guns.
Germany is now an aging society where the security of their pension plans is uppermost in their minds. Their MNCs’ have invested the EZ bonus of ultra low interest rates outside the EZ with gov’t encouragement. We have to face up to the fact that it is becoming increasingly evident that we have a Japan at the heart of the EZ. Japan looked unbeatable in 1989 and is now nearing an economic implosion after nearly a quarter century of stagnation.

Over shadowing all is China which is now deliberately slowing down its domestic investment in infrastructure, housing and commercial expansion. Commodity prices are down and the countries that export commodities are suffering. So not only is Germany’s vaunted manufacturing sector exposed to cut throat competition it is losing export markets in the previously prosperous commodity exporting countries. Russia of course is a German/French own goal.
FT Alphaville has a few good articles on how the $US will fare in a low oil price environment.

Gail Tverberg has an interesting take on the relationship between US QE and crude output, oilprice dot com is one source.

@ JR

You might have a point there. I am no expert in the matter of banking, either central, commercil or investment, but what remains at issue IMHO is the extent of the bond purchases and who carries the credit risk in terms of the ultimate contingent liability. German policymakers must keep looking over their shoulders to their constitutional court in the matter, the fundamental point of the latter’s decisions to date being, as I understand it, that this liability must have a defined limit; otherwise the budgetary powers of the Bundestag are being usurped. (I am not saying whether this view is correct or not; just noting the fact. It might be argued that Germany should never have agreed to the euro if such was the case but this brings us back full circle to the existence of the “no bailout” clause).

The basis for possible action by the ECB is being spelled out with increasing detail.

fyi – Power to the €Z Serfs!

Combatting Eurozone Deflation: QE for the People

Posted on December 23, 2014 by Yves Smith

Yves here. This post describes why having the ECB give money directly to citizens would do a better job of fighting Eurozone deflation than the US version. The author starts from the premise that QE worked in the US, when there is ample reason to believe it worked only for financial institutions and a small portion of the population. Here, the ECB would engage in what amounts to a fiscal operation, which also would have dome more to stimulate the economy than the Fed’s QEs.

By John Muellbauer, Senior Research Fellow, Nuffield College; Professor of Economics, Oxford University. Originally published at VoxEU

Eurozone deflation is likely to become reality when the annual inflation figure for 2014 is announced in January. This column argues that the ECB should develop a strategy that works in the Eurozone’s unique financial setting, instead of following the Fed’s lead. The author proposes that the ECB should pursue ‘quantitative easing for the people’, such as sending each adult citizen a €500 cheque.

In a sense QE, like OMT, has already succeeded in that the expectation of bond buying seems the only explanation as to why investors have driven peripheral yields in highly indebted countries to where they are today. Consequently, it is hard to see where we go from here.
US bond yields ended every period of QE at higher levels, presumably in the view that if it worked it would boost US growth and hence bring forward Fed rate rises. The ECB has another problem. of course (beside lingering issues on what it can legally do)in that there is no euro sovereign debt to buy. Hence the dilemma with regard to which government bonds to purchase- if it uses the capital key (the respective capital contributions by national central banks to the ECB) and spent €500bn it would purchase €90bn bunds(18% of the total) and €6bn Irish bonds (1.2%) for example. If it allocated a higher weight to the periphery we would be back to OMT.
Finally, the ECB intends to increase its balance sheet from the current €2,000bn to €3,000bn, the latter the size it was in mid-2012. What did that achieve ?

Sov yields are already low so hard to see what QE will bring. It doesn’t seem to do much for investment. EPS scams are more likely if the US is anything to go by. If the US starts raising rates on the back of the latest growth figures the EZ will not be happy. We are still in mostly uncharted macro territory where timing is everything.

From the ECB speech by VP Constancio!

“How great is the risk of deflation for the individual euro area countries?

Not all euro area countries are facing a risk of deflation. In countries such as Spain and Ireland, whose economies are slowly recovering, productivity is increasing. This creates scope for wage increases, which counteract the threat of deflation.”

@ DMcL

“Lingering [legal] issues”?

What can be said, it seems to me, is that the markets take the political realities more seriously than the legal ones (as perceived by lawyers). The German constitutional court has, by this stage, a long history of barking without actually biting in matters impacting Germany’s role in the EU i.e. largely succeeds in reflecting the somewhat ambivalent attitude of the electorate.

In the absence of previous liquidity injections by the ECB such as OMT or SMP where would yields have been? OMT bought time. One suspects QE will do the same plus inflate asset prices and make banks capital look better.
I suspect that the surprise for 2015 will be of the growth variety. 99% of the commentariat are bearish


OMT resulted from Mario getting the message that the phrase “Whatever it takes” was required by the markets.

He is also aware that an announcement that QE will occur is expected. so the necessary hoops will be jumped through to allow an announcement of some sort.

That should allow the show to remain on the road – until the next expectation becomes clear. Mario will then aim to meet that…

In a sense, it is like a rather grand box-ticking exercise.

Banks would need to start lending again for growth to get going. Is QE the best way to ensure that? Asset bubbles bring their own risks.

Loads of other channels for credit running from bond market to private equity. Ireland has recovered without banks.

Headline: Putin orders vodka price cap as Russia’s economic crisis escalates. It would look much better if it was”Kenny orders whiskey price cap as Ireland’s debt crisis worsens.”

Fixing broken credit channels is safer than leaving the field to private equity. At least CBs have some control over banks. The ur problem from the last time is debt that took on too much risk. I think that is why rates are so low. Too much debt.
The solution post 08 was to load it on to the official sector rather than write it off. Eg Anglo. That was possible on a once off basis. Why would this time be different risk wise? What will PE do if rates rise in the US ? It looks like financial jenga tbh. Happy Christmas !

Germany is blowing a housing bubble most often quoted as 40 to 50% over a decade. Infrastructure spending has been quite healthy for the past five years. It is likely that if interest rates remain ultra low that Germany will suffer the same fate as Ireland and Spain within 3 years. Rest assured that the Bundesbank will address the problem before that happens. Is the EZ ready for a substantial interest rate rise.

In the days when stimulus went directly to consumers a high proportion of it benefited the domestic economy. This is no longer the case which means direct to consumer benefits are ineffective domestically. Pushing funds through the banks to SME is a non starter due to lack of demand. The only solution left are massive public projects involving sand, gravel, cement, rebar, steel beams and labour, lots of labour.

An Irish Economy Christmas Blockbuster.

Bored at Christmas!? Do the underlying economic principles of fantasy environments drive you nuts!?

Prepare for an Irish Economy Christmas Special!

Now in 3D! Quick, put your 3D glasses on and stare at this screen for our very own Christmas Festive Blockbuster (only available on certain settings, terms and conditions apply).

Part One

Irritating Guests.

In a hole in the ground lived Halfling Mario. He was a conservative sort of fellow even by halfling standards and liked nothing better than each day be no more than 2% different to the last.

So when he was interrupted during the course of his second breakfast by a gang of a ragged and disreputable dwarves he was most put out.

“We are the dwarves of the periphery – hic.” said their leader Colm McOakenshield. “And we are come to claim our long forgotten gold.”

“Your gold is it?” Asked Mario sharply.

“Any chance of a hot toddy?” The wise old dwarf replied. “Anyway, it’s not doing anyone any good under the dragon Weidmann. “Pass the rashers.”

At the sound of that baleful name a shadow seemed to pass over the sun.

“We will need much wise council.” As he knew there was of very little of that, Mario, secretly hoped that would be an end to this disturbing talk.

“And that’s why you get me, Mario, baby. Grand Wizard Krugman!” Said the cloud resolving itself into the all too familiar form. “Do I look good in these robes? Have a lost weight? Say, you wanna head to a drippy gig later and maybe grab some clams? I know a great place.”

“Christ, no. Any chance of Wizard Stiglitz, even?”

“Hey, I’m hurt, Mario, baby. The powers above wanted to saddle you with one of those MMT headbangers. Consider yourself lucky.”

“At the words MMT everyone’s head began to hurt as if they were trying to tie their shoelaces whilst suffering a particularly nasty hang-over.” – But it’s so simple! A faint wraith-like voice whined over the Shire.

“Anything but that.” Said Mario, his mind made up. “Right, let’s go. Gold to be retrieved and scattered around Middle-Earth it is.”

“Soon as I’ve filled up my naggin”, said the redoubtable McOakenshield, “and who said anything about scattering it around Middle-Earth? Right, well what are you waiting for?”

“Er, aren’t you dwarves of the periphery going to quickly and impressively neatly do the washing up before we leave?”

“Shurrup – we’ve been washing up after you for the last six years – come on.”

Part 2


Halfling Mario and the Wizard Krugman crawled slowly up to the forest dell where moonlight on burlap sacks showed where the lumpy forms of the dwarves of the periphery had been tied up by three terrible trolls.

The first troll said: ‘FYI’ and scribbled a secret sigil link in the air.

The sigil link had a terrible power. If you went off and looked at where it led for a while it was really quite interesting and then you tapped on more sigils and you went further and further and then whole days were gone – and none of it had anything whatsoever to do with what the conversation had been about in the first place. The first troll was a master of this redirection.

The second troll said: ‘The Reverend Malthus’ at which Krugman barely suppressed a groan.

The second troll, in his trollish way – and there were no female trolls – was a fiend at finite systems from which nothing in this concrete universe could escape.

The third troll said: “the system is rotten and the rottenness must be purged”, with the fanatical look of burning copies of ‘Atlas Shrugged’ in his eyes and he fairly frothed over the notion of dust bowl. “‘The Grapes of Wrath’ is the ideal ‘how to’ textbook.”

“What do we do with these wicked trolls, Wizard Krugman, engage them in worthy debate?”

“Absolutely not – they’d have you in pieces and be licking your bones before you could say ‘nuance’. The best thing to do is: nothing whatsoever.”

And Wizard Krugman settled down to reading a Vanity Fair article about himself.

“Aren’t you going to distract them?”

“Why? They’re doing a great job.”

And it was true: the three trolls talked over, under and around each other until:

“Dawn take you all and to stone with you! Trolls can’t stand daylight, SuperM. Right, get kicking the bags and on we go.”

“Ouch!” Said Colm McOakenshield.

Part Three

Riddles Underground

Far, far down at the roots of the mountain, Halfling Mario shuddered in a dark so dark it was piercing and a cold so cold it wrapped itself under his skin and chilled his eyeballs.

“My precious insight! My precious insight! Where is my precious!” wailed the thin but annoying voice.

Mario clutched the mysterious gold ring even more closely and then slipped it on. He could see nothing! He was invisible!

“Well, no”, said the voice, “it’s just very dark. My eyes have adjusted.”

“I’m not invisible?”

“Clearly no – to be fair you’ve recently become more transparent.” There was an expectant pause. “That was a rawther jolly topical joke you know old chap.”

“What has happened to your voice, wretched creature?”

“Do yo mind if I go back to the Eaton accent. It’s easier on the throat?”

“Why you must be…?”

“Wizard, Keynes. Long since banished underground by my fellow wizards and, I’m hurt to say, frankly laughed at by my wizard colleagues.”

“But if the ring doesn’t make you invisible what does it do?”

“That ring”, said the elegant voice rather too close for Mario’s comfort, “can drop seven other rings of gold from it at any time.”

“It can make gold!” Mario’s brain reeled. Everything firm seemed at once shadowy and insubstantial. This was exactly the kind of strangeness he had been avoiding his whole life.

“Yass. For years now I have been underground hiding gold in jars, ready for these miserable days on Middle-earth when again Wizards and all good creatures would heed me. Just”, said the voice, very, very close now “tell everyone to start digging up the gold and you’ll be right as a trivet.”

“Well apart from….” and Mario could almost feel the sigh.


“The dragon Weidmann. That’s exactly the sort of thing that makes him angry.”

“Right, well. I suppose we should engage in a battle of riddles for the ring and then I’ll move on.”

“Oh no. You can have it.”

“That’s hardly some kind of teaching point challenge then is it?”

“Well. If you must. Riddle me this old bean. Why, if your inflation target is almost but not quite 2% are you stuck around 0.4%”

“Oh, that’s a good one. Er, Elvish oil is selling cheap since they harpooned a load of whales off the East?”

“It was more a pointed comment than a riddle.”

“Umm, It’s a temporary blip as a necessary correction takes place?”

“The umpire says, ‘wide’!”

“…. the rise of Mordor is depressing everyone…?”

“That’ll have to do. Have the ring and off you go.”

“I forgot to ask” called the plummy but rather sad voice after the fleeing halfling, “How is the Elven Royal Ballet?! Remember the arts! Remember the arts! It’s the perfect Keynesian example….. you will remember me won’t you?…. you won’t forget me again….. ?”

But Mario was too busy thinking of the ring that made golden rings.

Part Four

The Dragon Weidmann

Something smelled.

“I can feel a vibration in the force,” breathed the helmeted head of Darth Sinn.

“Can we stick to one fantasy? I hate fantasy inflation.” Murmured dragon Weidmann. Let’s leave mash ups to Christmas Doctor Who shall we?

“Are you sure, Emperor… we could perhaps do something with zombies?”

“Sinn, resume your true form.”

Chief Orc Sinn sighed and resumed his orcish nature retaining his majestic orc beard for the look of it.

The two were in council sat on a simply colossal heap of gold in the great cavern hall of the Bundesmountain. A sign said, “Gold Going Nowhere”. But something was not right.

“We have come for our gold – hic! – release the UCD graduates!” Bellowed the voice of Colm McOakenshield.

Now frankly this is the point at which the tale goes into an interminable scrap in which, in the movie version, the director gives loads of queasy making vertiginous effects with plenty of violins and unlikely near misses whilst in the book version the lead character rather more helpfully just faints allowing us to get the the end more quickly. So let us steer a more balanced course by just looking at the bare bones.

Whilst the dragon Weidmann lays waste to the UCD graduates Colm McOakenshield, with flailing yet rather pugnacious strokes, takes on Chief Orc Sinn for the InflationStone which has long been buried at the heart of the Bundesmountain. Finally McOkenshield grasps the stone and tears off the label, ‘warning: Zimbabwe.’

Sadly, in his moment of triumph, Chief Orc Sinn, buries the crusty old dwarf under a pile of Goldman Sachs statistics, and the stone passes to Wizard Krugman, who whispers the mysterious words, ‘3%, moderato.’ to it and releases the spirit of the stone.

Howling, “Weimar! Weimar!” the stricken dragon leaps on the spirit of the stone and claws at the wizard, who, remembering it is a Friday, wanders off to find some musical hipsters whom him can post on his, er, magic palantir blog, and makes one of his famous unfortunately timed exits.

Leaving just the terrified but plucky Mario and the dragon. Are we all up to speed? If not, ask the troll who says ‘FYI’ all the time for a link.

“Dragon Weidmann! I shall use the power of the ring.”

“What do I care if you’re invisible?! I can smell you!”

“It’s a completely different ring! This ring drops seven rings. Forged by Seafoid long ago in the IrishShire!”

“IrishShire, never heard of it. Wait, I remember – no wonder they joined the MiddleEuro. It must have caused terrible inflation.”

“Well, mainly they used it for making the finest goldwork the world has ever seen.”

“Really? I just pile it up in bars.”

“We’re straying from the point! I have traveled long and wearily through Middle Earth and I have seen enough. Unless you release the spirit of moderate inflation I will use the gold of this ring to spread throughout all the land.”

“Plus the chunk you owe us – hic.” Croaked the noble dying, or possibly just tipsy, voice of McOakenshield being carried out on a bier by a dozen grieving and tattered UCD grads.

“So that is it Halfling Mario. You dare to come to the inner hall of the BundesMountain and threaten us with that most accursed of magic – the creation of wealth.”

“I suppose on balance, I am, yes.”

“Never!” Cried the mortally offended serpent and….

What’s this? It’s ended? Have you set the recording time wrong again?

Or is it that the Movie makers have spotted the chance to spin this out for one more interminable part?

Either way, come back next Christmas and see how this deadly conflict works out! And possibly some other quest.

See you next year!

“Is the EZ ready for a substantial interest rate rise?”

Does ‘interest rate’ have any meaning now, in a world of CBs monetizing sovereign debt? And using their currencies as economic weapons? Maybe if there was some state entity which was ‘free’ from political influence (is that an oxymoron?) and they had the constitution authority to refuse to allow the creation of fiat money – and that currency was immune to being either traded or arbitraged. You had to settle your foreign debts using a rarish metal. Is this even possible anymore?

Relativity is fine for Physics quants, but not for currencies. Politicians and monied folk are completely untrustworthy in the presence of a currency freed from the force of gravity. And our best and greatest economists believe in The Free Market!

Gavin, thanks again. I’ll prinst and paste. And I thought Fairy Tales were, just legends, like. Seem they just maybe true, after all! Brian.

Best wishes to all for 2015. [and could we have our SpellChecker back?]

Wolfgang Munchau on the the likely shape of the QE proposal; if it ever sees the light of day!

He expected too much from Santa. In the real world, politics sets the limits and what the Greeks get up to now is no longer likely to impact on anyone except themselves.

Also of interest this comment by Professor Sinn on the alternative to QE; the Draghi stimulus programme.

With any luck, his fears will prove justified. However, his track record on this score is not good.

Greece looks very messy alright. A lot of other EZ bonds have zero risk premium baked into pricing now

I wonder if the Germans will parachute in a suitable Greek President , façon Monti, when they weren’t happy with Silvio

Acronyms associated with the EZ crisis.

“In the real world, politics sets the limits and what the Greeks get up to now is no longer likely to impact on anyone except themselves.”

You’re so cute, DOCM. It’s called political economy, actually.
If Greece leaves the Euro people like BEB will have to price Italy’s likelihood of following them. And that’s not that easy to do either in Excel on the back of a fag packet.

Pawns to the fore; Dancing with Wolves; or, De Special Relationship!

Coalition’s seismic shift turns into shifty sidestep

‘A 2012 International Monetary Fund study of 147 banking crises found Ireland is indeed a special case. There is nothing, anywhere in the developed world, anything like what was done to the Irish people. The IMF measured the pain for citizens on three criteria: loss of economic output, fiscal costs and the increase in public debt. “Ireland,” it concluded, “holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top 10 of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression.”

Thanks for the link, Mickey

“The economy is more random, unstable and insecure than we imagined. It is less susceptible to policy engineering” is a key point

ZIRP and QE have been going on for so long it’s very hard to know where the economy really is. Economists are as lost as everyone else.

Regarding the travails of the US middle class, the comments on this article are fascinating

“ZIRP and QE have been going on for so long it’s very hard to know where the economy really is.”

Not really. ZIRP and the many QEs are deeply mistaken policies – they prevent the most fundamental and basic economic event – the liquidation of bad debts. Worse, they promote the upward-only increase in the value of non-productive assets.

The steady advance of any modern, productive-consumption economy requires that both real and virtual capital be advanced for procuctive investment such that the risks associated with the lending can be reflected in the costs of the loans. That’s gone. Risks are now zero or as close as makes no difference. But debt advances steadily, is fixed and is contractural. You need steady advancing increases in wages and salaries to handle that debt. These latter have stalled and have even been deflated.

Our economies are advancing steadily – into a tar-sand debt sink. Our politicians may or may not understand the political risk embedded here. But when they do (some actually do), then they will have to devise a political protocol to permit the overindebted rid themselves of their unpayable debts. Not to roll over the debts – sine die, but extinguish them once and for all.

That Samuelson piece is a bit naive and silly. The question he might pose would be; “How will the US economy rebound as long as its keeps emulating the economies of East Asia? It cannot and will not. The same goes for us here in the EU.

Another very interesting insight

“The Wirtschaftswunder (“economic miracle”) was based on high investment and productivity growth. Neither has been evident in Germany for many years.
Investment has fallen 5 percentage points as a share of GDP since 2000, and labour productivity per hour has grown less than 1 per cent a year since 2005. Looked at another way, Germany’s current account surplus is a sign of weakness, not of strength, reflecting the fact that savings are not being invested at home. ”

Investment and productivity are problems everywhere with deflation the likely result.

@David O’D
Sure ’tis world leaders we are, all dis talk about US exceptionalism, tis the Oirish dat are truly exceptional. Will the pattern continue with tweedle dum or tweedle dee being elected agin.
May the sweet Lord save us with the aid of glorious St Paul da holiest wan of dem all. (dats a Kerryism).
We are past redemption without qualifying for a pension.


Sure but even for people who think things are normal it’s not clear what is going on.

Monetary Policy When the Spyglass Is Smudged

Early Elias, Helen Irvin, and Òscar Jordà

“An accurate measure of economic slack is key to properly calibrate monetary policy. Two traditional gauges of slack have become harder to interpret since the Great Recession: the gap between output and its potential level, and the deviation of the unemployment rate from its natural rate. As a consequence, conventional policy rules based on these measures of slack generate wide-ranging policy rate recommendations. This variability highlights one of the challenges policymakers currently face. ”

Also what Eichengreen said

“Making monetary policy has always been a complicated craft. Whenever there was an effort to reduce the art of central banking to a simple formula, be it an exchange rate target under the gold standard or an inflation target more recently, other problems – such as threats to financial stability – have had an awkward tendency to intrude. They will undoubtedly do so again. That should be a caution to those seeking to tie the Fed to algorithms such as the Taylor rule, a simple formula that purports to say how interest rates should respond to changes in inflation and output.

Why then did modern central bankers embrace the mistaken notion of mechanistic monetary policy? Part of the explanation is serial malpractice by central banks in the 1970s and 1980s. If policy makers could not be trusted to exercise discretion wisely, better to bind them to a simple rule.

Another factor was the increased sophistication of analytical models and methods. Fed staff first undertook a project using mathematical techniques adapted from engineering science to guide policy in the 1970s. Others quickly followed, believing that if the structure of the economy could be represented as a set of fixed mathematical relationships, interest rates could easily be fine-tuned. ”

And in the “real world” of markets it all relates to what happens if the Fed increases rates. Plus the sad state of financial modelling.

2015 might be a year to have another look at volatility

“In this Letter, we use evidence from surveys, the futures market, and model estimates to assess whether the expectations of future federal funds rates by professional forecasters and financial market participants are aligned with FOMC expectations as reported in the most recent Summary of Economic Projections. On balance, our evidence indicates that the public seems to expect more accommodative monetary policy than the SEP suggests. The public also appears to be less uncertain about the future course of monetary policy than FOMC participants.””

“Efforts to explain movements in exchange rates as a rational response to economic fundamentals have, for the most part, met with little success. More than thirty years ago, Meese and Rogo¤ (1983) demonstrated that none of the usual economic variables (money supplies,
real incomes, trade balances, inflation rates, interest rates, etc.) could help forecast future exchange rates better than a simple random walk forecast. With three decades of additional
data in hand, researchers continue to con.rm the Meese-Rogo¤ results.1 While some tenuous links between fundamentals and exchange rates have been detected, the empirical relationships are generally unstable (Bacchetta and Van Wincoop 2004, 2013), hold only at 5 to 10 year horizons (Chinn 2006), or operate in the wrong direction, i.e., exchange rates may help predict
fundamentals but not vice versa (Engel and West 2005).2 The failure of fundamental variables to improve forecasts of future exchange rates has been called the .exchange rate disconnect puzzle..”

Time moves on for Greece but the problem continues to fester. Comments coming out of Berlin, Brussels and Frankfurt have to be looked at as preliminary negotiating positions. It is also necessary to put the fear of the EC and ECB into Greece voters without appearing to be engaging in interference with a national election. Merkel herself is very careful to appear neutral which is sensible. Any tough talk will be counterproductive as in a red rag to a bull. The consensus is that Syriza is out on a limb and will not be able to backtrack as Samaras did.

Throwing the Greeks under the bus might actually be good for the other periphs. It would require massive intervention to draw a line in the sand. I suspect it might even require E-bonds. It would also serve to remind populations of the dangers of magic money tee economics.

There are other consequences to throwing the Greeks under the bus. Like that they might find a sharp devaluation and shedding external debt to be a big net positive. Like that a Grexit reduces uncertainty about what other exits might look like – Itexit for example – and that a reduction in uncertainty about outcomes itself makes something more attractive.

Italy is supposed to deflate itself to competitiveness along with France and Germany is refusing to pick up the slack by increasing public investment or boosting demand. Assuming competence on the part of those calling the shots is potentially dangerous.

We all know that policy has failed. Trying something else starting with massive QE, fiscal stimulus & deval of Europe will probably work. The route to that might require Grexit – well and good. That is Greeks own choice.

” Trying something else starting with massive QE, fiscal stimulus & deval of Europe will probably work.”

Nope. Its the debt legacy issue, you see. Both QE + Fiscal are predicated on issuance of ++credit => +++debt. Are folk just plain stupid, or what?

Start with debt writedowns. If that does not work (and I fancy it will not) then its writeoff time (won’t happen). That means that some mighty firms will have to be liquidated – unconditionally! You have to re-introduce real fear-of-failure back into the financialization casinos.

The only credible ECB target is zero price (CPI) increases over an extended period. Money (in all its funny and unfunny forms) has to be severely restrained. Wages and salaries? If they do not advance smartly how is all the legacy debt to be paid down, in an orderly manner? With new QE? That’s pure delusion stuff.

QEs goe to Wall Street and is thence re-cycled again and again – by Wall Street. Little passes through to the Main Street horses’ digestive and excretory systems – for the sparrows to pick up.

I believe most folk are clueless about what Lord K actually meant by his ‘fical stimulus’. For this to be ‘successful’ it had to occur in quite specific (pre-WWII) global economic situations: none of which now exist. So what’s to know? A lot. But its just quite inconvenient.

Wolfgang Muenchau points up the contradictions in the popular Greek – and other debtor countries – positions. In sum, populist politicians are selling to credulous voters the incompatible objectives of reneging on debt – both public and private – while retaining their savings in euro.

Something has got to give.

Given that the supposed earth-shaking Greek general election is on 25 January and the supposed date of the supposed earth-shaking decision on QE by the ECB is the 22 January, the possibility of neither turning out to be the case must be high.

The views of Shane Ross.

This comment is worthy of special reference.

“The European chieftains fear him in a way that they never feared Kenny. Even more ominous for them is the tweaked tone of his demands in recent weeks. Tsipras is no longer requiring a total debt write-off, moderating his manifesto to writing off just 50pc of the national debt and an end to austerity. He is even promising to stay in the eurozone and negotiate a new deal, rather than unilaterally repudiating the debt on his arrival in office. He sees the real prospect of power after January 25.”

The European leaders in question must be relieved that Tsipras has “promised to stay in the eurozone”. Or maybe the fact that the incipient Greek recovery risks being strangled at birth by the possibility of a government led by him is the real reason for the “tweaked tone” of his demands!

“In sum, populist politicians are selling to credulous voters the incompatible objectives of reneging on debt – both public and private – while retaining their savings in euro.”

Hey up, DOCM. You mean that populist politicians did not sell to the Moral Hazard gamblers in Wall Street (and the City) the compatible objectives of abolishing downside risk on their very dodgy financializations and assuring them of a constant stream of almost ‘free’ money to gamble with?

Naw! The populist pols would never engage in such deliberate bad behaviour, now would they? Oh! You mean they did – not once but several times. And they intend to continue? This time in Frankfurt and all points EZ? Now why would they want to do this?

So, maybe we should get all these fiscal and monetary contradictions lined up. Might make for uncomfortable reading.

Best wishes for 2015, by the way. Nice to be back!

I don’t think it is possible for Syriza to lie about the future even to the extent that Labour in Ireland signalled porkies before our last general election. Syriza are making it abundantly clear that while their preferred option is a negotiated write-down within the euro, they are prepared to risk departure from the euro to achieve their other objectives. Voters who don’t want to take that risk have enough information to know not to vote for them.

Leaving the euro may not be the optimal outcome for Greece, but for economic outsiders and for those insiders whose assets are in real property it is probably better than the existing straitjacket.



The issue is the incompatibility, and how it is to be dealt with, not what the individual actors got up to. Nobody was forced to borrow money, to my knowledge.

The other constant feature – which never ceases to amaze me – is the unwillingness to either pose, or attempt to answer, the question of where all the borrowed money went. The answer probably lies in an unwillingness to face up to a fact too indigestible to contemplate; much of it transited from the pockets of one sector of the population into those of another (both IMHO probably represented among the Ballyhea marchers!).

We have a pretty good idea where the borrowed money went. It was principally lent against property development and commercial property. The lending books of BoI, AIB and Anglo in this area increased by €122bn between 2003 and 2008 according to Donovan and Murphy. A lot of this went straight back out of the country into overseas investments – maybe about half. Overall domestic mortgage lending rose by €56bn (Nyberg).

As borrowers have themselves absorbed most of the wealth losses in residential mortgages, overall lending losses were overwhelmingly on property development/commercial lending books.

So who were the winners on the other side of the deals that went sour? Well, with half of the increase in property investment/commercial lending going abroad, I would have to guess that maybe half the beneficiaries were abroad too.

Within Ireland, we are looking at a two-way split. On the one hand, owners and speculators in development lands who got out before 2008 would have done well, but that is a *very* narrow part of the Irish population, and a lot of the proceeds would have gone to corporate entities rather than individuals.

On the other hand, we have people who benefitted, directly or indirectly, from construction-related work during the bubble. However, it would be a mistake to claim that on the whole people directly involved in construction-related work really benefitted from the bubble. It had short run benefits but a medium and long run catastrophic impact on the careers of many thousands who found themselves stranded with skills for which there was little demand. The real beneficiaries were those who could extract rents from the higher level of economic activity that was driven by increased construction employment, and which were able to retain those rents through the collapse that followed – public servants; many of the higher professions; grocery retail and wholesale; energy businesses; international brands that have a price for the continent, a price for Britain and a special price for the Celtic goldmine; owners of properties subject to upward only rents; etc.

“Nobody was forced to borrow money, to my knowledge.”

True. But I did not notice any concerted action by the CB, or politicians or lenders to caution folk against ‘irrational exuberance’ or to impose some limits on the credit.

Where did all the moolah go? Wouldn’t we all like to know that. But, maybe we should just ask were did all that leveraged moolah come from in the first instance. Like, who were the commercial lenders? Or are we talking about a layer-upon-layer of leveraged lending? Might be.

Unlike water (which is subject to gravity) and which trickles down, money possesses an inherent magnetic attribute, hence flows upward, attracted by larger accumulations. Maybe that’s it. Money went to Money Heaven!

On Greece, Peter Spiegel of the FT has as good a summary of the likely course of events as one is likely to find.


A brave try! But with quite a few caveats. To mention three. The “pockets” that benefited can be Irish but not actually in Ireland. The distinction between corporations and individuals is specious. Corporations, by definition, are the property of their shareholders and, even if they do not distribute a dividend, their shares can be used both as collateral and traded. That borrowers have absorbed the losses on residential mortgages is true but only up to a point. A large percentage – notably in relation to BTL – have not; with the connivance of the banks and another large percentage by way of pretend and extend AKA restructuring.

The beneficiaries of the boom need to be separated from those benefiting from the steps taken to recover from it (mainly borrowing very large additional sums). The benefits have been much more fairly spread, with the exception of those forced to emigrate and no longer around to gain from them.

1) The counterparties on overseas investments that benefitted from incautious investments by Irish developers seem likely to mostly have been local property owners, local wheeler dealers and local people doing construction related work – not other Irish folks.

2) The corporations that benefitted from being able to sell Irish property at grossly inflated prices had an Irish shareholder base that was tiny compared to the total population. How many people do you think benefitted from the sale of Jury’s in Ballsbridge? How many from the Irish Glass Bottle site?

3) Extend and pretend seems to actually be working as a means of minimising banking losses on BTL lending. It’s amazing what can be done by governing Ireland Inc as a property and banking business. In any case, BTL is a relatively small part of the total picture in comparison with property development/commercial.

1) “Developers” or individual investors who thought, mistakenly, that an apartment in Bulgaria was a sure thing?

2) Do you have the data to back this claim up? (The company that Bewleys is dealing with is owned by Johnny Ronan).

3) What point are you trying to make? For my part, as a taxpayer, any mistaken BLT investments should be wound up immediately.

1. If you refer back to my original point you will see that I am referring to the something of the order €60bn that went into overseas property development/commercial. That category does not include individual purchasers of rental properties in Bulgaria.

2. In this case, I am afraid that data can only be the plural of anecdote without access to the files of NAMA and the banks, and reference back to shareholder registers. Your point about the company that Bewley’s deals with being owned by one guy with other extensive property interests tends to reinforce my view.

3. My point is that the losses on BTL look likely to be small in comparison with losses from overseas and domestic investment in property development/commercial, making your point about BTL only marginally relevant. This is partly because, big though the amounts invested in BTL were, they are dwarfed the amounts that were invested in property development/commercial. In addition, it is because the really big losses were sustained on development land whose value fell to a small fraction of what was originally paid for it, rather than built properties that retained 40% to 50% of their peak value at the market trough. It is also partly because the government has manipulated the market to achieve a recovery in house prices. Unprincipled though it may be, extend and pretend on BTL has been a central component of that manipulation.

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