The ECB’s Policy Target

The only centralised macroeconomic policy target in the Eurozone is the ECB’s 2% inflation number. Today’s flash estimate from Eurostat shows a price decline of 0.2% over twelve months. The index for the Eurozone has in fact been flat now for eighteen months – today’s number of 117.70 compares to 117.61 in June 2013.

The undershoot would be a concern in a proper monetary union operating at the ZLB: real rates are too high. In the Eurozone, which is not a proper monetary union, just a common currency area with heavily indebted states, it creates two additional problems.

The real burden of debt is not eroding at the advertised rate. If the ECB had delivered a 2% rate since December 2008, at which point debt build-up in the periphery was already manifest, the index today would be 121.6 rather than 117.7. If the ECB fails to get the rate of inflation up to 2% for another couple of years as QE-pessimists fear, the failure to hit the inflation target could add 5% or 6% to real debt burdens of sovereigns which have already had to resort to official lenders.

The second problem is the absence of any other centralised macro policy instrument, if you discount, as you should, Jean Claude Juncker’s leverage wheeze. The instrument that has fallen short is the only one available.

The inflation target should now be Olivier Blanchard’s 4% rather than the ECB’s 2%, if only to make up lost ground. If you believe that the ECB cannot or will not deliver on the inflation rate, the alternative is illegal: a fiscal expansion financed by the central bank, the kind of thing they do in real monetary unions.

Comments

comments

61 thoughts on “The ECB’s Policy Target”

  1. Total policy failure. And the EZ doesn’t have a proper LOLR either for the next time panic stations reign.

  2. Real monetary unions? Or sovereign states with their own national currency?

    Unless one is comparing like with like, comparisons are largely meaningless.

    There must also be a large question mark over the assumption that central banks, of whatever hue, have the vaguest idea as to what they are doing; other than keeping the rickety vehicle of free market capitalism on the road.

    http://www.ft.com/intl/cms/s/0/14078740-9277-11e4-a1fd-00144feabdc0.html#axzz3O4eTUXK8

  3. Colm is right as always. The Indebted sovereigns in Europe should issue 1000 year bonds to the ECB at 1% and buy in about a third of their debt at current yields. The quid pro quo would flat primary accounts for ever.
    I suspect we need a catalyst for such a massive intervention. Can we all go to Greece and vote for Mr Tsipiris so that Grexit becomes a reality and forces the hand of the Germans.
    Otherwise we should move to the next stage, which is the breakup of the EU and the ritual blame of Germany for its traditional scorched earth policy.

  4. The reason that inflation has gone negative in the EU is because energy prices have collapsed. Brent oil has gone from 120$ per barrel to 50$ per barrel in six months. How exactly is the ECB supposed to control this? The primary reason is the huge increase in oil production in the U. States. What is even more comical is the determination of certain commentators to portray this massive fall in oil prices as a bad thing (for Europe/Ireland). It is beyond parody.

    Far from being the disaster for Europe/Ireland that they claim, the massive fall in oil prices is in fact a bonanza. If oil stays at 50$ per barrel, it will add 3% to Ireland’s real national income in 2015, over on top of whatever increase is achieved from real volume growth. Other European countries can expect similar, in inverse proportion to how energy-independent they are. That is the direct benefit. Other spin-off benefits include reductions in air travel prices, which will accelerate the massive tourism boom Ireland is enjoying, reductions in fertiliser costs for farmers, and reductions in costs all round The list is endless.

    Of course, it may not last. Eventually, the price of oil will go back up. I have no idea if that will be this week, this year, or this decade. But, I predict that, when it does occur, those who are now saying that the fall in oil prices is a bad thing will then be saying that the rise in oil prices is a bad thing.

  5. QE may help but a global deflationary trend will continue for some time.

    The commodity price spike of the past decade led by demand from China, followed the 20th century when real prices fell from the 1900 level. Global food prices in the 1990s were lower than in the years of the Great Depression.

    Draghi has suggested that the ECB should aim to return the balance sheet value to the level of early 2012 which would mean about €600bn.

    George Saravelos of Deutsche Bank suggested last October that most of it could flow into emerging country assets.

    http://bit.ly/1Kokw4s

    China is already chomping about the falling yen and the EU is its biggest trading partner. A big plunge in the euro is likely to trigger devaluations elsewhere.

    Beyond QE, there are no magic solutions.

  6. Hi, Colm, John and Michael! Best wishes all – for 2015.

    2% inflation?? This must have a ‘bad’ outcome over the long-term – since it significantly dilutes the purchasing value of the currency. Long-term savings and pensions get whacked. Having wages and salaries ‘inflate’ at the same rate and time-scale is barely tolerable.

    If one wants to ensure things economical, then it has to be a Steady Advance all around. The historic level was approx 3% pa. Now. Its below 1%. The rules of math and the physical laws dictate that exponential rate lines will inflect to a max. So, after 300 years or so of futile cycling our Steady Advance economic paradigm will stall out – like it has now? Productivity gains become marginal at best, and only in some sectors. So whither our economies?

    QEs in the US, Japan and UK have done what exactly? Provided grains of wheat for the sparrows – after passing through the horse’s digestive system?

    So now we get the Official Pfaffers pfaffing about, applying leeches and other worthy cures which simply exsanguinate the unfortunate corpus still more. “The operation was successful, but the patient expired.” Looking good!

    If the ECB (or other CBs) were subjected to an MRI scan – would it confirm the presence of an asentient, invertebrate life-form?

    @ JtO: Hey John, go easy on that crude! Low price is a disaster – for current indebted folk, and for future production prospects. Carpe diem!

    @ MH: “Beyond QE, there are no magic solutions.” True. But successful failures are always reprised!

  7. Of course the ECB, or rather Germany, will have to give in and allow a full scale QE. The problem is that it is probably already too late as the Euro is seriously declining relative to the USD and combine this with a possible Greek exit is calling into question the whole idea of using the Euro as a reserve currency. Basically the USA has got away with a serious amount of QE and got a growth spurt as the extra cash eventually hit the high street and the jobs market because they are currently the reserve currency and central banks around the world want dollars in the same way as techies want bitcoins pushing up the value of both. In Japan a similar attempt has failed and resulted in a serious decline of the Yen. In the U.K. I am afraid the jury is still out, whatever Cameron’s hopes, as the QE growth there has been largely financial and has pushed up property values in London and done very little else. Demand is slack driven by an ideological austerity drive that sees all rentier and capital gains income as “entrepreneurial and good” and all social transfer payments as “anti-job and bad”. This has led to a serious long term decline in median take home incomes that any amount financial engineering, QE or fiscal management will never fix. The power of the unions has been deflated so much that any growth in GDP there just feeds the top 5% and any multiplier effect is cancelled out by the lower effective tax rate on the super-rich who tend to save and spread their cash abroad much more than Nigel average.
    This brings us the ECB and the omens are not good, QE if started will just concentrate on driving up asset prices as the obsession of the central banks to look after the western elites and the banking system will be continued. You will then have the central banks hovering up government paper reducing yields and leading to the bizarre situation where you will have the executive branch of the government in massive debt to another branch the government the supposed independent central banks.
    So now back to the ECB policy target the only long term lever they have is interest rates as QE is only going to be used to pump up the bubbles in real estate and stocks. Commodity prices are crashing so the value of cash is increasing, deflation is coming whether they like it or not. The problem is the cash balances are increasing not decreasing with QE dollars followed by QE Euros flooding the system. These cash balances are building up in the multinational accounts and the accounts of high net worth individuals, any time any asset class is seen to produce any significant long term yield then this wall of cash will crowd out the asset creating a mini-bubble until that asset also becomes non-performing and at high risk of a price crash and deflation.
    The central banks can no longer up interest rates because if they did they would immediately bankrupt the sovereigns starting with Japan who is just about to blow. Nor can they use –ve rates and/or QE as QE cash is mobile and upping the demand bubble assets such as stocks. What they could is – the USA recently spent 1.5 trillion on a war in Iraq that produced a lot of misery and nothing else, however did the US very little if any economic damage – What if the QE cash could channeled into solving the unfolding catastrophe of climate change creating jobs, demand and hopefully long term solutions to humanities greatest challenge…….but I forgot the western governments are dominated by the western elites whose focus is on their digital balance on a computer in the Cayman Islands and lowering “entrepreneurial” capital gains tax……

  8. 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.

    http://www.nakedcapitalism.com/2014/12/combatting-eurozone-deflation-qe-people.html

    I’ve had more than enough of the ‘banking system’ and its pathological players.

  9. The ECB’s rhetoric on QE has already achieved two things, a lower euro and historically low long term bond yields across the EA, the latter offering the opportunity for Governments to borrow at rates that no-one imagined possible. Witness Ireland issuing 7-year debt at 0.87% (although the bid/cover looked pretty low).
    Draghi promised ‘immediate action on inflation in November but had to again delay on QE at the December meeting( the press conference was very awkward for him I thought) presumably to await next week’s ECJ response on OMT. Assuming that is not an outright negative the Governing council appears to be considering three options; buying EA sovereign debt based on ECB capital share, buying AAA bonds only or for each country’s Central bank to buy debt and face the credit risk.
    What is dispiriting in all this is the absence of any coherent explanation as to why any of the latter would boost core inflation ( currently 0.8%) as it has not done that in either the US or the UK. But one lesson from the crisis is that the governing elite in the EA will do ‘whatever it takes’ to keep the show on the road, so a much more expansive fiscal policy may yet appear.

  10. Unless the economic zeitgeist changes and investment becomes preferable to issuing more debt to an already supersaturated system it is hard not to see deflation persisting indefinitely.

    The German Wirtschaftswunder was based on high investment and productivity growth – wouldn’t a return of that sort of thinking be wunderbar?

  11. @DOD

    I like your method of QE, but think €500 is too low. How about €2500 to every of the ~400 million EZ citizens. That is about one trillion, the amount initially mentioned by Draghi, as far as I recall.
    A debt to repay that in 10 years time is a worthy asset in any person’s book, or at least as worthy as the (outside EZ paper assets) paper assets that are envisaged; or indeed some of the paper assets currently on banl balance sheets.
    There would be no problems with low inflation after that.
    Still, better to bail-out those holding financial assets, I suppose. They need the break.

  12. John the Optimist is right.
    Strip out the effects of energy prices and the EZ inflation actually rose in December.

  13. With the exception of Greece, sovereign yields in the Eurozone are already at, from the issuer’s standpoint, bargain levels. Ten-year money is under 1% in Austria, Finland, France, Germany and the Netherlands. The QE-pessimists are right to question what is achievable through reducing these yields any further. Yields are under 2% in heavily-indebted Italy and Spain, a little over 1% in Ireland and Belgium, and only 2.50 in Portugal.

    The key issue is whether political insurrections, starting with Greece (10%) but most critically in Spain towards the end of the year, will re-define ‘whatever it takes’.

  14. “Basically the USA has got away with a serious amount of QE and got a growth spurt as the extra cash eventually hit the high street and the jobs market ….”

    jules, I’d be quite skeptical about this. The Main Street sparrows got a poor share of the billions (or should that be trillions) that the Fed hosed into the Wall Street gambling casinos. US labour participation rate for adults has settled in 58% – 60% band. It needs to be closer to 63% to confirm ‘recovery’. Also the US median wage continues to decline. That’s very un-positive for the resumption of a Steady Advancement (aka: growth) of their economy – by any economic metric.

    Any QE, not matter how its lipsticked up – is still a money pig. Its significant debt write-downs and write-offs that we have to endure first. Without these, the nett economic growth rates will have to be 10% for 10 years – in a row, to reduce national, corporate and personal debt levels to so-called sustainable levels. So, 10% for 10 years? Improbable? I’d opine so.

    A “Come to Jesus moment” – soon? Keep an eye on Brazil and India. If either ‘go down’ things will get a mite interesting. Some major oil exporters are also in poor shape – with Venezuela being one to watch. Depends whose holding their debt, and how its structured.

  15. Excellent contribution Colm, notwithstanding the pettifogging sniping. That link DOCM posted tends to confirm that the ECB is suffering from Gold Standard envy despite Draghi’s rhetoric.

  16. The ECB still has no hesitation with regard to the use of the threat of cutting off the liquidity tap if countries do not stick to their obligations.

    http://uk.reuters.com/article/2015/01/08/greece-election-ecb-idUKL6N0UN0BO20150108

    Despite the views of Frances Coppola.

    http://blogs.ft.com/the-exchange/2015/01/08/why-qe-wont-resolve-the-eurozones-fundamental-money-problem/

    It seems that 2015 is set to be the year of living dangerously. The elite that has to decide is, essentially, resident in Germany as those in the financially and economically solvent countries of the EU will follow its lead. “In for a penny, in for a pound” must have an equivalent in German. It is too late to continue pretending that the euro, a quintessentially political undertaking, does not carry with it a financial cost, and not just benefits, for the country providing the anchor.

  17. Central banks, under their current monetary constructs, can’t create inflation. They can jabber on about it but the reality is ever-so-slowly-dawning on people that monetarism is dead.

  18. Some years ago, around the time of this video
    https://www.youtube.com/watch?v=2jDcPbSCluA

    investment in business, productivity and wage increases were replaced as the drivers of growth by asset bubbles and debt expansion.
    That model only works if inflation is at or above 2%. Otherwise debt strangles the real economy.
    And there is just too much of the stuff now.

    Net debt-to-sales increases for US corporates as does the amount of borrowing used to fund the leveraged buyouts undertaken by big private equity firms. Covenant light loans are very fluirseach.

    No Fed head wants to be the one to pull the plug on the monetary escalator and the markets channel the spirit of Sandy Weill who told the Financial Crisis Inquiry Commission in 2009

    “If you look at the results of what happened on Wall Street, it became, ‘well, this one’s doing it, so how can I not do it, if I don’t do it, then people are going to leave my place and go some place else’,”

    The denouement will be very messy.

  19. @DOCM
    “The ECB still has no hesitation with regard to the use of the threat of cutting off the liquidity tap if countries do not stick to their obligations.”

    My understanding of the ECB remit is that it may refuse to supply liquidity to a bank whose collateral is inadequate. Such a decision on the inadequacy of collateral necessarily involves subjective judgements, but it has no more power than that.
    No matter how well disposed one is to the ECB, one can hardly concede that it can assign to itself the power to ‘shut down’ a country’s banks; despite the actions and comments of Trichet and others over the past few years.

    In any case the likely response next time round, of any country faced with such a scenario, would be to immediately introduce capital controls; such capital controls may be inconsistent with the existence of a ‘monetary union’, but Cyprus implemented them, and so will others.
    Capital flight, in the next crisis, will be met with the response it should have met with on day on.

  20. The ECB still has no hesitation with regard to saying it has no hesitation with regard to the use of the threat of cutting off the liquidity tap if countries do not follow orders. Whether it actually has no hesitation in cutting off liquidity will be interesting to discover if matters in Greece follow their likely path.

  21. @ JR

    I am simply picking up on a report on the actions of the ECB and stating its obvious implication. What people make of it is up to them. What I make of it is a repeat of a point that I have made many times; this is senior hurling and complaining about the hard knocks associated with it does not get anyone very far.

    As to the attitude of Tsipras, it makes perfect sense in the school of hard knocks i.e. Greece, as I understand it, has achieved a primary surplus – it can fund its current level of government expenditure – and arrived at the point at which it could, theoretically at least, tells its creditors to take a hike. Both sides will continue the game of chicken until a conclusion, whatever it is, is reached.

  22. I’ve the same question as JtO on this one. Surely, with much of the fall in prices driven by a huge fall in oil prices, the net effect is actually a gigantic stimulus to the real Euro economy.

    Falling oil prices is mostly driving the change (as per this chart in Eurostat http://ec.europa.eu/eurostat/documents/2995521/6455292/2-07012015-BP-EN.pdf/7a179764-787e-4a10-a72b-0abde719ee44) and if falling oil prices has somehow become bad news to the EuroZone economy then we’ve really entered the Twilight Zone.

  23. This discussion is focussed on monetary policy.
    What about the need for an expansionary fiscal policy?
    Has Europe learned nothing form Keynes and the 1930s?
    A bird never flew on one wing.

  24. @ HS: “the net effect is actually a gigantic stimulus to the real Euro economy. ”

    No, a decrease in the posted price of crude affects economic activity in several different ways. There is crude and there is crude: pieces of string, and all that. The ‘best grade’ commands the premium price (benchmark). Lower grades of crude command lower prices. Crude is not used directly – but needs to be refined. Costly business, refining – most especially for the lower grades of crude. Best grades are in shortish supply: lower grade are more plentiful – and cheap. Hence, ‘consumers’ will not see the full economic benefit of a decrease in prices.

    Refined oil may be used directly as a transport fuel (air, surface, marine) or in power generation. This latter is being phased out in favour of nat gaz. So transports should be ‘stimulated’. True, but surface + marine are pretty low at present – diminished global demand for goods transport. A local swallow does not signal summer!

    The secondary and tertiary end-users of oil and oil-based products will experience quite different affects: these become less and less the further they are down the chain the consumer. Diminishing margins and all that.

    The principle economic issue is stalled or declining global (overall) demand. Local or regional demands are not much better off. There’s more.

    But, as I opined obove: its pieces of virtual string of indeterminate lengths. Do a Mrs Doyle. Have a cuppa!

    @PS: “Has Europe learned nothing form Keynes and the 1930s?”

    You said it Peter, the 1930s. Its 201n now. It was production for export then; its consumption of future income now. Neither fiscal or monetary stimulatory seeds of grain will pass through the Wall Street digestive system to the Main Street sparrows. Well, a few maybe.

    The best any government can do now is to prevent the worst ravages of income loss on the affected members of its population. Our governing elites have been heroic economic failures so far. Just expect more of the same.

    A blinded Samson (despite his short back-and-sides) managed to pull the roof in. Our politicians had better watch out. Mobs are blind.

  25. @Brian Woods. The issue with oil was also that there’s more supply. Fracking, largely.

    @Seafoid. Yes. It’s true that deflation has been on the radar. But what we’re seeing at the moment is deflation driven by lower oil prices. Which also implies a stimulus. A big one.

  26. @ Hugh

    But debt thinking and the focus on financial assets rather than workers mean pay rises are not on the table. Look at the US and what passes for corporate strategy. And until pay rises are back we are going to be left with real world stagnation, financial instability and deflation. That missing 2% inflation is really important and asset bubbles won’t fix it.

  27. As the benefits associated with oil price reductions has been mentioned here a few times, I thought I might ask if the reductions have translated into lower electricity charges for consumers yet?
    Or are the Irish rent seekers still alive and well?

  28. @Brian Woods
    I accept that the majority of the FEDs QE ended up backing Wall streets gambles that would folded or crashed into another Lehmans creating a new huge moral hazard. However some of it without doubt tumbled down to main street witness the latest earnings and employment numbers in the USA. How sustainable it is is a huge question as it all based on the FED buying in some cases dodgy assets and underwriting them with printed dollars. As they say it socialism, subsidies, supports, low capital taxes and rigged markets for the ultra-rich and capitalism with highly regressive taxes such as VAT and property for the rest of us.

    Will the coming European QE be any better. As a number of others have pointed out this all about monetarism and not stimulus so it is hard to see it going anywhere other than transferring printed Euros to dodgy hedge funds that gambled on Spanish and Italian gilts. The Germans are saving and sanctioning themselves into a recession like the Japanese before them and no amount of QE stimulus, even if given directly to them, is going to make them go to the cash machine and spend. All they will do is save further reducing demand.

    What about oil, oil taxes and prices are highly regressive on incomes so for the first time in about a decade and a half we may see some additional demand from the “spending” low income families and a transfer of supports, however regretted by the governments, away from the ultra-rich “saving and investing” families. Hence it should be good and may put off and/or delay the next recession. The only caveat is that a lot of the fracking investments in the US in particular are highly leveraged and are not profitable at USD $60 a barrel – they will go bankrupt and will need to be saved by another round of QE!

  29. One interesting phenomenon that has been observable recently is currency appreciation for the dollar and the pound because the market thinks their countries are both doing better than anywhere else. Corporate profit levels seem to be driving those perceptions. Stock markets love wage stagnation but they don’t think long term through the implications.

    Neither the US nor the UK show any sign of wage increases or productivity gains and the rise in the currency of each puts pressure on the growth the market expects – this was one of the reasons behind the flash crash in October when the BoE and Fed had to rush out economists to calm down the invisible hand and reassure it that interest rate rises would be put on hold.

    Wage increases have to be part of any compact to get the world economy out of the debt trap.

  30. @Joseph Ryan. The potential for lower consumer energy prices has at least been mentioned in the press. http://www.irishtimes.com/business/retail-and-services/consumers-set-to-be-big-winners-as-energy-price-war-starts-1.2051408 and there are press reports of business gains already. http://www.irishexaminer.com/business/irish-firms-energy-costs-slashed-by-up-to-18-304448.html

    But on the main question. While deflation may in general be a bad thing, this particular deflation looks like a good thing. Can’t see why it wouldn’t be.

  31. The issue with oil prices is the Saudi’s have decided they want market share about all else.

    Deflation is on the radar for three major reasons, oil prices is just adding to it.

    1) Poor demographics.
    2) Moore’s law (technology).
    3) Weak Unions

    Printing money just ends up going to share holders or towards inflating assets, cos there is no demographic related ‘growth’ businesses and today’s ‘start ups’ require very little labor & capital. Hence high property/share prices over most of the developed world and things like crazy prices for pieces of ‘art’. As the money has to go somewhere.

    I’ll give you an example. My brother has a start up. They’re 4 engineers. A good idea, it involves manufacturing a small device which contains a lot of technology and programming an app to go with it. They plan on selling it at around 100 euro. They devloped a prototype. It took them 2 months hard work (70 hour week kind of stuff). All 4 are Irish tax payer paid for University graduates.

    An accelerator program in California is going to give them 50,000 for 6% equity and provide them with 2 months worth of consultants time, marketers and product designers and a 2 week trip to where it’ll be manufactured, Shenzhen China. They’ll fund it from via the ‘Kickstarter’ website. If it succeeds the 4 of them could be millionaires and the end user gets a LOT of technology for 100 euro but 90% of the work will be done either by robots in China or in Amazons warehouses on the distribution side. Incidentally all of the initial 50,000 will go on them paying rent to a Californian landlord.

    If the ECB can increase their balance sheet by giving people that spend money money then maybe then can get inflation up. How about employing people in labor intense activity that technology hasn’t conquered fully yet eg Rail/Housing/Carbon reduction/Flood defenses/Battery tech/Broadband fiber roll out/Ecars/Child care etc etc or make it more affordable to have a family via cheap housing or maybe 2nd child ECB paid for child benefit to parents?

    In the medium to long term, QE could even add to deflation. It’ll increase asset prices, leading to more expensive housing, wages will stay stagnant (as technology acts as a strong deflationary pressure on an increasingly un unionized labor market) and rent seekers will continue to get a bigger slice of the pie. Making it ever more pricey for people to move out of a bedsit to start a family and adding to the miserable demographic problem. Which will increase the tax burden.

    So you’ll end up with a European society of people in 5 meter square bedsits working to pay taxes and rent. Though at least they’ll be able to use a cheap virtual reality headset to pretend they live in a reasonable size house with a family and a holiday once a year. Though there’s always the chance they’ll get sick of pretending and one day decide to go buy a made in China Pitch Fork instead.

  32. Joseph Ryan: only about one quarter of the retail electricity price is accounted for by fuel costs. Don’t hold your breath.

  33. @ JR: “Or are the Irish rent seekers still alive and well?”

    Very much alive and with high expectations of a bigger surplus! Elec generation is only partially oil-related (for IRL Inc).

    @ HS: This oil business is one mighty tricky, confusing and confounding economic matter. Oil is only one of three strategic fossil fuels in use: its simply the best – by an order of magnitude! Hence its salience in our 201ns economies. Some critical economic elements are 100% dependent on refined oil and oil products: air and most surface transport; commercial farming and food processing. About two decades ago the concept of oil as a physical commodity to be delivered as contracted: via a regulated exchange with strict margin requirements went out of favour and it became a financial deriviative to be traded in unregulated OTC dealing rooms. Physical delivery and margin calls are gone. Contracts can be settled by rollovers and paper delivery. The entire oil market is very murky indeed.

    The Frantic Frackers are driven by very short-term cash-flow considerations, not by any sense of a long-term committment to produce and supply a strategic economic commodity. They are now being taken behind the woodsheed and getting the financial hiding they deserve. However. Any significant liquidations of their massive leveraged debts will spell real trouble. Cue, QE mk:IV – just not for us little folk!

    Basically, the medium and long-term outlook for crude production is dire. Once crude benchmark prices retrace over $100 bbl (and they will) its “Goodnight Vienna!” for our developed economies.

    @ seafóid: 2% ‘inflation’ ??? Money or prices. That would be pretty bad news for us if our incomes and salaries went in the opposite direction. Can you envisage Chindia doing QEs for their rural peasants to encourage them to consume their own productions? I do not.

  34. @Joseph, only about 1% of Irish electricity is generated from oil, so you should not expect reductions in the price of oil to have a material direct impact on electricity prices. The rent seekers are alive and well in electricity, as Paul Hunt used to demonstrate here, but they are not doing it through oil arbitrage.

    However, they are not solely responsible for Ireland’s outrageously high electricity prices, which (as Colm McCarthy has accurately argued) are also a consequence of over-installation of wind power heavily subsidised by consumers. Subsidisation is both direct through feed-in tariffs and indirect through paying through the nose for the network infrastructure and underutilized gas turbine generating capacity required to make overscale deployment wind power feasible. As the installed wind power base continues to rise, it is reasonably to expect that our electricity prices will move further out of line with competitor countries.

  35. @ That’s legal

    Central Bank liquidity is driving asset prices, not the economy. So the prices are fake. Investing in productivity would be far more sensible.
    The next crash is going to be very Minsky.

  36. @Colm. Yet the press reports talk of savings on the high teens of percent for gas (which has also seen softer prices). That’s a good thing when prices fall. If that’s deflation, why not have more of it?

    @Brian. I know the oil industry pretty well. Your points are not relevant.

  37. It makes sense to me that Central Banks should be able to increase money supply to reflect the value of labour/work/economic output within an area. Central Banks should also be able to reduce money supply to reflect the value of labour/work/economic output when the multiplier gets too high. The problem seems to be that interest rates are a difficult tool with a zero bound and QE is an inequitable and partly ineffective tool with a systemic risk of damaging confidence.

    It is also worth considering that nil or negative interest rates are inconsistent with inflation. If my money is not losing value under the mattress as compared to being on deposit then why would I deposit it and allow the banks to lend it out? This is a paradox at the heart of the relationship between interest rates and inflation.

    We need to devise solutions without reference to the institutions and to bend the institutions to the solutions. One solution might be for the Eurozone to print money and to spend it on EZ projects throughout the member states based on a per capita split. The money needs to get to main street and needs to be linked to economic activity as traditional transmission methods are proving ineffective.

    The economic pruning benefit of the bust will be lost if things continue to stagnate and the youth of Europe, and the world, are left to think about how else they might give their lives meaning in the absence of decent job prospects.

  38. On GeoPolitics of OIL

    ‘Now more information has emerged, confirming prior “rumors” and “conspiracy theories.”

    During the closed-door meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC members that OPEC had to combat the US fracking boom. If OPEC cut output to raise the price of oil, it would lose market share, he argued. The way to win would be to allow overproduction to depress prices to the point where they would destroy the profitability of North American producers. And they’d have to cut production, rather than OPEC.

    With Saudi Arabia’s overwhelming power within OPEC, his argument won against objections from desperate members, such as Venezuela, Iran, and Algeria, which wanted a production cut to push prices back up.

    “Naimi spoke about market share rivalry with the United States, and those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” a source told Reuters to make sure the message got out.

    Asked if this was a response to rising US production, OPEC Secretary General Abdullah al-Badri essentially confirmed OPEC had entered the oil war against the American shale revolution: “We answered,” he said. “We keep the same production. There is an answer here.”

    http://wolfstreet.com/2014/12/01/saudi-arabia-declares-oil-war-on-us-fracking-hits-railroads-tank-car-makers-canada-russia-sinks-venezuela/

  39. @zhou. The choice for most people between putting the money in the bank and keeping it under the mattress (or in a safe at home). Keeping cash at home is a bad idea and draws 0% interest, so most people would be prepared to pay something to keep it safely in a bank instead. We pay bank charges, after all. That’s akin to negative interest and negative interest could be explicitly charged.

    While I agree with your point, it’s not ENTIRELY incompatible with inflation. Merely that most times there’s historically been inflation someone’s been prepared to pay you something above 0% to hold your cash in a safe place. Similarly with negative yields on sovereign debt. Easier/cheaper to ask someone like the German govt to look after your cash than to have to do it yourself. There’s a limit, however. At anything above a small negative interest rate people will figure out how to hold cash themselves. Vaults aren’t THAT expensive. I’ve never heard of and can’t immediately imagine a scenario with negative interest larger than – say – a few tenths of a percent being taken at any scale. Retail customers might pay a percent or two, I guess. Probably already do, in effect.

  40. A particularly topical extract.

    “A key part of the solution is to improve private risk-sharing by deepening financial integration. Indeed, the less public risk-sharing we want, the more private risk-sharing we need. A banking union for the euro area should be catalytic in encouraging deeper integration of the banking sector. But risk-sharing is also about deepening capital markets, especially for equity, which is why we also need to advance quickly with a capital markets union.”

    The problem, however, is the chicken and egg nature of his general argument.

    http://www.ft.com/intl/cms/s/0/59d205b8-9739-11e4-845a-00144feabdc0.html#axzz3OM386O6Z

    In short, Europe’s banks will begin to trust one another when their governments begin to do so. To quote again the minutes of the BOE from 2008 as relayed by the IT.

    “Actions announced first by the Irish government and then the German government were both unclear and uncoordinated and led effectively to a ‘beggar thy neighbour’ policy which froze the international banking system.”

    The international banking system seems to be on the road to recovery. Not that of the Euro Zone.

  41. @ HS: “@Brian. I know the oil industry pretty well. Your points are not relevant.”

    OK, can you sort them out for me? Thanks.

  42. China has come to the rescue of Venezuela and Ecuador further weakening American influence in Latin America. There are likely to be serious repercussions as the Euro sinks below US$1.20, Coupled with the Yen going over Y120 to the US$. It will increasingly look like competitive devaluation to Americans. Will they take it sitting down as the EZ, Japan and China eat their lunch. Syriza has broadened its base which means the burn down the European banks brigade is being sidelined. They are likely to reach a negotiated settlement that will be the lesser evil for both sides. Greece will benefit from a form of debt relief that will not leave the Haus Frau with egg all over her face. It is not likely that Greece will leave the EZ unless Putin and China make an offer they will find difficult to refuse. Remember Russia would find a base at Piraeus even more useful than their Syrian base. China is already a major player in Greek ports and railways.

  43. @Brian.
    1. The oil industry has always been murky with contracts and hedges and futures. But since Standard was broken up it’s only been OPEC that ever got close to a lock on the market. It’s a big multilateral market so it doesn’t really matter how oil is traded or settled other than an occasional hiccup. A big hiccup for a short while, but not for long. The price settles out somewhere “fundamental” quite quickly. But in the medium term OPEC, or the Saudis really, can shift the price. That’s what’s happened.
    2. Oil, gas, LPG, LNG, etc., are all (except possibly for aviation) largely substituable at the margins. Ships can burn stuff that you could nearly build houses out of. Crack the same stuff (at appreciable cost, mind you) and you could run cars on it. Gas and oil have independent supply chains (largely) but impact on each others price by substitution. Gas is in many ways as important since it’s used to make fertilizer, but this discussion is about the short term impact of prices, not their long term strategic interchangeability.
    3. Frackers may be short term, or not. It’s a huge play and still probably early days. And then there’s shale oil. And the deepwater plays. All open up at high price. All risky compared to Saudi oil. All capping long term oil prices. And I’d be surprised if the amount of debt on high risk fracking investment is systemic anywhere. Might be wrong, but I’d be surprised. So all that’s really relevant right now is that the price has fallen.
    4. The medium and long term outlook for oil production has ALWAYS been dire. Eventually the outlook will be right. But there’s gas out there too and enough heavy oil to last enough time that we won’t have to worry about it running out right away. Right now what’s relevant is that the price has fallen. Not the medium or long term future.

    Meantime, the main point – that you also imply and that I agree with – is that LOW oil prices are good for the EuroZone economy. If they also (temporarily) drive deflation I don’t see why that’s a problem for the EuroZone. Rather it’s a good thing.

  44. View from the far right in Switzerland. Of interest is their fear of a uniform EU corporate rate.

  45. Wage stagnation is going to kill the recoveries in the US and the UK

    Osborne missed his deficit target of zero during the life of the current parliament because of wage stagnation
    http://www.theguardian.com/news/datablog/2014/dec/03/why-has-george-osborne-missed-the-deficit-target

    More crap US non farm numbers for December- no sign of wage increases above inflation

    http://www.ft.com/cms/s/0/3cc791bc-9802-11e4-84d4-00144feabdc0.html

    “2015-01-09 07:48 by Karl Denninger
    in Employment , 229 references Oh Boy…. (Employment Report)
    This report is kinda nasty, despite the cheering on CNBC and elsewhere.
    Total nonfarm payroll employment rose by 252,000 in December, and the unemployment rate declined to 5.6 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing.
    Sure it did…..
    Well, if you believe the cooked numbers that is. But the internals look pretty nasty; let’s start with the ones that are being talked about.
    Average hourly earnings fell. Not by a lot, and average hours remained stable at 34.6 (which is far more important than hourly earnings, incidentally.)
    But — this is from the establishment survey and is seasonally-adjusted (that is, made-up.)
    The household survey tells a different story entirely.
    The household survey says that the total number of people employed fell by 476,000 last month. This, on the back of a -270,000 print last month, making this one month off from a trend (three makes a trend) and worsening from the last report. In addition the number of those who left the labor force increased by 959,000 last month on the back of 506,000 leaving the labor force last month — also two months of three, and again worsening.
    The employment:population ratio decreased by two tenths, also being the second month in a row of declines.
    So the bottom line here is that the “decrease” in unemployment had exactly nothing to do with improved employment (in fact actual employment declined for both of the last two months) but instead was comprised of people who are unemployed giving up on finding a job!
    That, of course, is not being reported — all that is being talked about is how “strong” this report is given the establishment figure. However, the lie factory is running into a fairly serious problem in that full employment (which is commonly regarded as a ~5% unemployment rate) should bring significant wage pressures (upward) — that isn’t happening, and the reason it’s not is quite simple:
    The actual number of people employed is falling, not rising, and as a result there is no reason for employers to pay more! “

  46. Wolfgang Muenchau makes a good case in today’s FT for a drop of helicopter money as part of the ECB’s response to looming secular stagnation. He admits though it would be ‘far too unconventional for the European mind’.

  47. I think we are all forgetting something cash and debt do not exist except in the minds of men. Debt in simplest form (or real form) is a legal lien on the future earnings of another individuals earnings, companies earnings or state earnings. Cash is what you can get for it and in essence is a means of exchange and control of an economic system consisting of individuals, companies and states.

    Of course Colms “economic” statement is correct. Windmills are adding to our electricity bills. A similar argument could say yes the provision of medical care to the over 80’s is adding 5% to the tax rate. Stop it!

    The ridiculous equating of financial, dollar euro or easter island headpunk assets to reality is in essence the western ongoing demise. Of course it makes financial sense to transfer all production to China as production labour costs are 1/5 th and you can buy your blender at 1/5 th of the cost. Yes.

    The notion that large digital balances by individuals and cooperations in computers scattered around tax haven computers control the real world, that is is throes of a massive environmental catastrophe is ridiculous to say the least.

  48. @ Peter Stapleton

    He says 10K per citizen would be 3tn or the size of the UK QE programme.
    And instead of going to everyone most of it went to the top 1% which is why so much money went into upmarket London property.

  49. Interestingly, recent speculation on overhangs of junk debt in the USA focus on highly leveraged fracking investment – and that the amount of bad debt might actually be systemic in scale. So in response to this discussion from January, I confess surprise!

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