Quote of the day

 “One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.” 

(Angela Merkel, according to the FT.)

It is very good to see this sentiment being openly expressed by the German leader, since it is what we believe the German government thinks, and confirmation is useful. But, really, it is intolerable. Where in the treaties does it say that Eurozone monetary policy should be run in a sub-optimal and deflationary manner, thus increasing unemployment, putting the public finances under pressure and worsening economic distress more generally, so as to force other peoples’ governments to do things that the Germans think are good for them, but that have nothing to do with monetary policy?

No democrat should accept a Eurozone run along those lines.

70 replies on “Quote of the day”

Neither should they confuse references to “improving competitiveness” with “increasing economic distress”. Improving the first could well reduce the latter.

Amen. Happily Eurozone competitiveness is improving anyway, courtesy the expectation of QE and the weakening Euro. The boost to competitiveness is particularly strong in Ireland, thanks to the wretched persistence of our trade with non-Euro Anglo Saxon countries. A year ago, over September 2013 to March 2014, the Central Bank’s nominal exchange rate index averaged about 109. I reckon today’s level is about 104, a useful devaluation of the (trade-weighted) exchange rate of 4.5%. The Swiss float and Thursday’s announcement of actual QE should help things along a little further.

The Bundeskanzler will be disappointed, but that’s how it works with non-optimal currency areas.

There was a design fault with the euro,which Germany and France must take responsibility for. The cumulative effect of so many member countries of the euro zone inflicting austerity on their economies is likely not to be the optimum solution to the mess this design fault has created.

@ colm

External trade is only a around a fifth of the Eurozone economy. So even if the Euro is weaker it’s not going to do enough on its own to remedy the deficiency in domestic demand in the zone.

German intransigence is at least as dangerous as Italian sloppiness.

As Scotland’s freedom referendum showed, the only thing holding the U. Kingdom state together is the widespread belief, energetically fostered by the U. Kingdom state/government/military/media/academia agencies, that being a member of the Eurozone is a death sentence and having sterling as your currency is the gateway to prosperity and happiness.

However, it hardly fits in with the facts.

(a) Ireland is growing at twice the UK rate.

(b) Ireland’s budget deficit in 2015 is predicted to be less than half the UK deficit.

(c) Ireland has a massive balance-of-payments surplus, while the UK has a massive balance-of-payments deficit.

(d) Ireland’s borrowing rates are much lower than the UK’s borrowing rates.

(e) Ireland is out of austerity, while the UK is not even halfway through the process.

The key to it all is competitiveness:

euro/sterling exchange rate Jan 2009: 0.91819
euro/sterling exchange rate Dec 2014: 0.78830

HICP index Ireland Jan 2009: 107.6
HICP index Ireland Dec 2014: 108.7

HICP index U. Kingdom Jan 2009: 108.7
HICP index U. Kingdom Dec 2014: 128.2

Putting these together, between Jan 2009 and Dec 2014 the U. Kingdom price level rose by 35.7 per cent relative to that in Ireland.

Those economists advocating that Ireland exit the Eurozone and resume the link with sterling should tell us how Ireland would have fared with such a massive loss of competitiveness.

I should have added:

This massive loss of competitiveness (35.7 per cent) is not hypothetical for N. Ireland, but real.

As a consequence, economic activity in N. Ireland slowed sharply in H2 2014 and actually fell in December.


While the economy of the R. Ireland is harding for 5-6 per cent growth over the next few years, the economy of N. Ireland is heading for relative stagnation. I doubt if those economists advocating that R. Ireland exit the Eurozone and resume the link with sterling will be focusing much on that in coming years.

N. Ireland is suffering twofold from the sterling link:

(1) The UK policy since 2007/08 of printing bucket-loads of banknotes has resulted in massive inflation (17.9% between Jan 2009 and Dec 2014 v 1.2% for R. Ireland).

(2) While normally one might expect sterling to fall to compensate for the much higher UK inflation, in reality the sterling exchange rate is determined largely by the fortunes of the finance industry in London and the South-East of England, with colonies like N. Ireland not having a look in. The bizarre result is that N. Ireland’s currency rose against Germany’s by almost 15% between Jan 2009 and Dec 2014, despite far higher inflation, which must be one of the most ludicrous exchange rate movements ever.

“Where in the treaties does it say that Eurozone monetary policy should be used to increase economic distress so as to force other peoples’ governments to do things that the Germans think are good for them, but that have nothing to do with monetary policy”

The Treaty was always going to do that the Treaty is capable of imposing tight constraints on national policies in its member states and because central policy-making in the Eurozone is dominated by German political and economic actors, whose various agendas go far beyond the text of the agreements setting up EMU. K O’R seems to be startled that treaties are instruments of power and control by one state vis-a-vis others, and that is the essential starting point for analysing them. This sort of Eurozone is the only Eurozone that is on offer, indeed that was ever on offer.

This is a very good analysis


“The eurozone’s problems, and the mistakes in policy exacerbating them, are familiar. An uncompetitive periphery, including Italy, the eurozone’s third-biggest economy, is attempting to deflate its way to competitiveness within a single currency with all the economic retrenchment that involves. The process is being made more painful by constrictive fiscal policy guided by budget rules that contrive to be both opaque and counter-productive.

Meanwhile, the core economies, particularly Germany, are failing to pick up the slack by increasing public investment or boosting domestic demand. Germany has set itself the arbitrary goal of balancing its federal budget next year, and has taken the recent weakness in its GDP as a reason to redouble its efforts. It is often said that Germany is a large country that acts like a small one – without regard for the impact of its actions on neighbours. In this case, it is behaving like a small country without regard for itself.”

I suppose fundamentally the Chermans have a different attitude to debt than Anglo Saxons. But why did they let it get out of hand pre 2008 ?

@ otto

Not so! The treaties constitute primary enabling acts but the meat of decision making lies in the adoption of secondary legislation by the various bodies, including by the ECB which, since the Lisbon Treaty, figures as one of the EU’s “institutions”. The rules vary according to the basic treaty article, in some instances, unanimity, but in most by qualified majority voting (QMV) where the votes now bear a direct relationship to population. By this measure, Germany has the biggest voice but it must get a qualified majority to agree with it which is often difficult. It cannot either, no more than any other country, decide the nature of the proposal to be decided. This is the job of the Commission. Within the ECB, the situation seems less clear and to have recently changed cf


As a collegiate body, simple majority must apply (as in the case of the Commission). But ignoring the political and economic weights of the countries whose central banks are represented in the voting, now on the basis of rotation, would be politically naive, to say the least.The fact that Germany swallowed the change, although circumstances are very different to those which existed when the treaty change was made, illustrates the fundamental point of the treaties; they are made to be applied. This decision is a collective one, not that made by any country, even the biggest.

@ All

On competitiveness, price as impacted by fortuitous currency movements must surely be only one element! To quote the wiki.

“Competitiveness pertains to the ability and performance of a firm, sub-sector or country to sell and supply goods and services in a given market, in relation to the ability and performance of other firms, sub-sectors or countries in the same market.”

Actually the UK is doing quite well.GDP is 2.9% above the pre-crisis peak, employment is at a record high and the unemployment rate has fallen to 5.8%, For those in work pay growth has been sluggish but private sector earnings are now picking up (2.2% annual rise in latest data this morning) which means decent real growth as CPI inflation has dropped to 0.5% and is expected to turn negative over next few months. The IMF, among others, had claimed that policy there would prevent a recovery and Lagarde, anyway, had the good grace to say they were wrong which is rare.

Angela is speaking euphemistically. What she really means is that the ECB should not facilitate countries that persist in living beyond their means from getting their act together.

The Greek shinners are pressing for the ECB to effectively write off the bulk of their debt. I presume this comes with a promise that they will behave in future. Anybody believe that? Greece desperately wanted into the euro, to the extent that they cheated. Now they desperately want to stay. Well they will just have to learn the hard way and not expect that being in the club means money on tap.

QE may well work to boost confidence in the short term but as applies in Japan, and as tiresome as the issue maybe, there will have to be some efforts to address problems that have pre-dated the euro in France and Italy in particular.

It’s not just competitiveness – outside of commodities, you need to have products to sell in growing markets.

The FT reports [Calling the probable introduction of quantitative easing by the European Central Bank on Thursday as “only part of the fix”, Axel Weber, now the chairman of UBS, said that there were legitimate questions hanging over the viability of the single currency.

If countries do not reform, he said: “I think there will always be questions about viability of the project and Europe has not done enough to dispel these concerns”

Saying the policies of structural reform, particularly in the periphery of the eurozone – Italy, Greece, Spain, Ireland and Portugal – were inadequate, Mr Weber, who was the president of the Bundesbank until 2011, said, “Now Europe’s not back, the problems are back”.]

In contrast with the UK where only 80,000 of 1.1m UK jobs added since 2008 were full-time employee positions, most German jobs added since 2011 have been full-time permanent positions.


Given how the euro operates in practice, in your view is it now fair to say that peripheral countries should be examining whether there are any plausible ways of leaving?

What percentage of GDP would be lost in a recession likely caused by leaving and how much of that lost output has or will be suffered by staying in? Are we (or more realistically Spain, Greece and Italy) any where near the point where the cost of staying in is higher than the costs of leaving?

Excellent questions Christy.

The political classes are petrified of even engaging in the discussion and when pushed hard enough on the matter will respond in superlatives about an apocolypse and other generalities of equal proportion. They will rarely be pushed on such matters either by a complicit media who sees their job as one of advocacy on views already set in stone.


I think, at this point, it is beyond time for the “peripheral’ countries to work on a plan that would enable *Germany* to leave, with her best friends in tow; indeed it would be interesting to see who those friends *actually* were, should push, literally, come to shove.

The WSJ says a proposal from the European Central Bank’s executive board calls for bond purchases of roughly €50 billion ($58 billion) per month that would last for a minimum of one year, according to people familiar with the matter.

The ECB’s executive board met Tuesday to decide on the proposal, which will form the basis of deliberations by the entire 25-member governing council on Thursday.

As I vaguely understand the proposal, each national central bank in the Eurozone contributes to the risk allocation in this new QE programme by purchasing the appropriate value of government bonds of its national government bonds. The acquired assets (national government bonds) and liabilities (cash created to pay for the bonds) remain on the balance sheet of the national central bank. If there is a default by a Eurozone member government then the member’s national central bank also has a big balance sheet hit — is this the correct interpretation of the plan? That seems to be the contentious issue — who supplies the risk capital for QE. This divides up the provision of risk capital among the national central banks, each backed by their own government. Details fuzzy and not finalized, but interesting plan? What does De Grauwe think of it?

The refusal of the Germans to contemplate risk sharing means they put a higher value on credit risk than the markets do at the moment. But the pavlovian response to QE means this will be ignored.


“You don’t have to be a Catholic, or a Marxist, to acknowledge that Europe is beset by serious problems: soaring unemployment, the unresolved crisis of the euro, rising anti-immigrant sentiment, and the stunning loss of a sense of possibility for young Europeans everywhere – events made intolerable for many by the invisible bondholders, exorbitantly bonused bankers, and the taint of venality that spreads across Europe’s oligarchic political class. “Right in front of our eyes,” the Polish thinker Adam Michnik laments in his new book The Trouble with History, “we can see the marching parade of corrupt hypocrites, thick-necked racketeers, and venal deputies.” “Today, in our world,” Michnik argues, “there exists no great idea of freedom, equality, and fraternity.”


A core Euro would be hard currency and a piggy euro would devalue every so often so Ireland would be in the latter.

@Gregory Connor

If the plan is that national central banks will buy their own govt bonds in the secondary market ( or buy some other well-rated national bonds), then it is nothing more than ELA to holders of national bonds (ie. banks in the main), with the liability for ELA residing with local national bank, in the more fragile economies.
The national central bank will be under constant threat from the ECB, to justify its purchases and reduce them. We saw how ELA worked for Ireland!

In reality, as the bonds will transfer from private hands onto national central bank balance sheets, national solvency will deteriorate, for any country deemed incapable of servicing or repaying maturing bonds.

Gregory Connor:

If the national central banks are guaranteed against loss by their governments then the private holders of sovereign debt are juniorised. In the absence of Eurobonds the alternative would have been the ECB taking the risk. This was verboten.

Time for Germany to exit the euro zone and adopt its own variation of the euro. Call it the Deutsche-euro, D-euro.

D-euro would jump by 20% against world currencies, including remaining euro, overnight. To the level it belongs and Merkel deserves. Remaining euro currencies depreciate their debt by at least 20% overnight, then adopt their own version of the euro later.

Soros was right a few years ago when he suggested it.

This new QE risk allocation plan sounds like a reasonable compromise? If Grexit happens this plan increases the loss given default on Greek sovereign debt for the reason Colm McCarthy notes above. But it does not directly increase the probability of Grexit and might lower it due to higher inflation induced by the money supply increase. If Grexit happens the Greek central bank has increased liabilities it cannot pay and defaulted assets on its imaginary balance sheet, but it will need to start over with the Drachma anyway. For the other member states where exit probabilities are low it just increases the money supply and there is a little bit of seigniorage. The higher the interest rate on the national bonds the more profits are paid back to the national government from seigniorage.

If the ECB does decide to buy €600bn a year the issue of how that is distributed is also of interest. If one uses the adjusted capital key to divide up €600bn a year across the 19 members it would mean that the national central banks (or ECB depending on risk sharing) would be buying widely different shares of their respective bond markets. For example, just under 10% in Germany, less than 9% in Ireland , under 7% in Italy but 24% of Greece and some 20% of Cyprus.

A handy summary courtesy CNBC.

“European QE is set to start with a bang rather a whimper, a fact that will be well received by investors,” said Nancy Curtin, CIO of Close Brothers Asset Management, in a research note after Draghi’s announcement.
“The euro zone was in need of shock-and-awe tactics from the ECB to combat the prospect of a prolonged period of deflation, and Draghi has finally delivered on his promise to do ‘whatever it takes’.”

The ECB will purchase euro-denominated investment-grade securities only. The debt of countries like Greece, which are subject to international bailout programs, will be subject to “additional eligibility criteria,” Draghi said.

Debt that is trading with a negative yield will also be eligible for the program. Draghi also said that in the event of a sovereign restructuring or default, public and private bondholders would be treated on equal terms.

Twenty percent of the additional purchases will be subject to risk-sharing arrangements, designed to limit the amount of risk the ECB takes on to its balance books. The majority of risk will remain with euro zone national central banks.

No more than 25 percent of each debt issue will be purchased. The maturities of the debt purchases will range between two and 30 years.”

We now know the actual size of QE but not the spilt between sovereign and private sector. Assuming €50bn per month of the former implies about €0.85bn a month of Irish government debt .
Draghi was asked about the risks of hyper-inflation following central banks printing money and thought it amusing but pointed out that QE elsewhere had not created much inflation anyway!
How much is priced in to the market will be interesting but it has contributed to a currency depreciation to date , although speculative shorts in the euro are pretty high.

re: QE as announced.

Will the purchases be mandatory on those countries that opposed the idea?
i.e Can the Bundesbank etc refuse to purchase its ‘allocation’ of QE on principle, or must all CBs purchase as per the programme laid out.

AND the Finns have softened their cough!!!! Vis-a-vis Greece. Further extension on the table and SYRIZA haven’t even won yet.

Will Enda et al. fight for ‘equal treatment’? Will the headline be ‘Fastest growing OECD economy gets debt written off by slowest’ or ‘Greece wins further debt relief, Ireland still burdened’


@ Seafoid

I would wager a sizable sum that if a core/periphery divide emerged Leinster House would do everything within it’s power to put us on the core side of it.

The 20% risk-sharing number is a misrepresention. 12% of total QE purchases are being targeted at bonds issued by European institutions (and supranationals) such as the EIB, EFSF, World Bank and so on. This 12% is fully risk-shared. Whoopee. If the EFSF defaults, the ECB’s a goner too.

The remaining 8 percentage points of risk-sharing applies to the remaining 88% of asset purchases. So in fact 91% of the ri

@That’s legal

Ireland likes house booms which are more Euro piggy / devaluation style economics .

Very similar to the UK and look at a graph of sterling vs the DM over 40 years

The 20% risk-sharing is a misrepresention. 12 percentage points of it are hypothecated to cover losses(read “defaults”) on bonds issued by European institutions such as the EIB/EFSF and their like. If they go, the ECB goes. The remaining 8 percentage points apply to the other 88% of bonds purchased by NCBs, mainly sovereign bonds.

So only 9%, in round terms, of government bond purchases are risk-shared. 91% of the risk rests on NCBs.

Balkanisation, as mentioned by an earlier poster, is probably the most apt description of this move.

Forgot to mention – the Dutch must have got their bicycles back.

Their parliament yesterday voted against any risk-sharing at all, in the event of QE.

@ Seafoid

No doubt. That is neither here nor there though. You can’t possibly think that if it came down to it the political argument for joining a Greek/Spain/France/Portugal currency union would win the day? Over a Finnish/German/Dutch/Belgium/Lux one?

Politicians and voters have got a taste for hard money. They won’t be voting that away too easy. Even the Greek electorate, who would clearly benefit from exiting the euro don’t want the Drachma back.

What is the evidence linking QE to a sustainable rise in inflation and especially wage inflation ? Would a helicopter drop not make more sense or would that have not enough trickle up factor?

Question: I get that national CBs will purchase bonds and the asset side of their balance sheets will expand. How is the liability side expected to expand to match? Bank reserves? Thanks.

Man of the moment. Cicero would approve!

End Austerity Before Fear Kills Greek Democracy

22/01/2015 by Alexis Tsipras

“Greece changes on January 25, the day of the election. My party, Syriza, guarantees a new social contract for political stability and economic security. We offer policies that will end austerity, enhance democracy and social cohesion and put the middle class back on its feet. This is the only way to strengthen the eurozone and make the European project attractive to citizens across the continent.

We must end austerity so as not to let fear kill democracy. Unless the forces of progress and democracy change Europe, it will be Marine Le Pen and her far-right allies that change it for us. We have a duty to negotiate openly, honestly and as equals with our European partners. There is no sense in each side brandishing its weapons.

Let me clear up a misperception: balancing the government’s budget does not automatically require austerity. A Syriza government will respect Greece’s obligation, as a eurozone member, to maintain a balanced budget, and will commit to quantitative targets. However, it is a fundamental matter of democracy that a newly elected government decides on its own how to achieve those goals. Austerity is not part of the European treaties; democracy and the principle of popular sovereignty are. If the Greek people entrust us with their votes, implementing our economic programme will not be a “unilateral” act, but a democratic obligation.


Since Churchill sent in the British Army after WWII to hammer the red partisans, who had fought bravely against nazis – a real left in Greece has been a fair while coming. Welcome …

The Irish Times editorial team took on the topic of QE on Wednesday. There’s a strong element of “will this do?” to the piece.


“The European Central Bank is failing in its mandate to keep the rate of inflation in the euro zone close to 2 per cent. Therefore it needs to act and looks likely to do so on Thursday, announcing a programme of quantitative easing (QE) to try to boost inflation. It is important now that the programme is of a sufficient scale to make a difference and that its design is not purely a function of compromise.

The ECB has moved significantly under the presidency of Mario Draghi, in particular his commitment in July 2012 to do “whatever it takes” to protect the euro has had a powerful impact on the financial markets. The immediate threat now is not to the euro itself, but to the economic conditions in the euro zone and the dangers they pose. Consumer prices in the euro area fell 0.2 per cent in December from one year earlier and while falling oil prices were a key factor, the danger is that a deflationary trend sets in, with all its damaging economic consequences.
The vital challenge facing the ECB tomorrow is to alter people’s view of what the future inflation rate is likely to be. QE worked, to an extent anyway, in the US and the UK, even if there will long be debate about what mix of policies contributed to the stronger growth these economies are now experiencing. The ECB has no choice but to follow with its own QE programme, though governments also need to do more to promote growth.
Financial markets expect that the ECB may announce a programme which involves buying upwards of €500 billion of government bonds, effectively trying to lower interest rates charged to borrowers and increase the flow of credit. It is not a programme where success can be guaranteed – official interest rates are very low already, after all, and the euro zone banking system through which credit flows is only gradually working itself back into a healthy position.

However the costs of entering a prolonged deflationary slump more than justify the risks of failure.The ECB simply has no choice but to act and do so decisively. There has been some debate about whether it, or the member central banks should actually purchase the bonds as part of this programme. While we will have to see exactly what is announced, fears that this might put all the risk back on member governments and their central banks may well be misplaced. Still, in communicating the details of this Draghi will need to walk a fine line between German sensitivities and market reaction, both influenced by perception as well as fact.

The ECB move must be big enough and clear enough to have a significant impact. That is the challenge facing Draghi who should also point out that the ECB alone cannot restart growth in Europe and that considerable responsibilities also rest with member state governments. ”

The sports editors would never dare present such flannel to their soccer supporting readership.

RTE isn’t much better


“Some key questions about the new quantitative easing policy launched by the European Central Bank today.

What does QE mean?

The ECB is effectively printing money by buying government bonds – following a policy previously used by the US and the UK to stimulate economic growth.

Why is it doing this now?

The euro zone faces stagnating growth and has seen inflation plunging to minus 0.2% threatening a damaging spiral of falling prices that it is feared would lead to consumers putting off spending and firms delaying investment.

Why doesn’t it just cut interest rates?

Interest rates have already been slashed to 0.05% while cheap credit has been offered to banks in order to stimulate lending. Buying up these bonds – parcels of state debt – increases the amount of money circulating in the economy creating more stimulus.”

This is a really good article from Buiter from December


He sees 4 required components for a way out of the morass

1. proper stress tests of banks and recap (acharya estimates 450bn)
2. temporary fiscal stimulus in the piggy zone permanently funded and monetised by the ECB
3.ECB to cancel the sov debt it purchases
4 radical supply side reforms in Italy etc that boost output growth by at least 1.5%

The latest QE programme is plámás .

AEP gets some of his facts right but, as usual, is wide of the mark in terms of his conclusions.


He fails to address the question; is France a Latin or a Northern country?

Given that Hollande pre-announced the action of the ECB and Merkel as quoted is not noting outright opposition – which in her political circumstances can be read as an endorsement – it is difficult to avoid the conclusion that the two countries that account for more than half the EZ have arrived at some form of policy accommodation.

@ That’s legal

“Politicians and voters have got a taste for hard money. They won’t be voting that away too easy.”

I don’t think voters will get much of a say. You can have your purchasing power reduced by inflation, UK style, or by straight out salary cuts (Switzerland’s industry minister has opened talks on this theme with the unions today) but it’s the same end result whether you are in a hard or soft currency.

Hard currencies have lower borrowing rates but higher speculator demand. There is no silver bullet when the system is in virtual chaos.


Showed your post to a Swiss-based investor friend and he asks,

“where in the treaties did it say that public sector workers in countries like Greece and Ireland should have their salaries practically doubled in a just a few years to be higher than in Germany and the Netherlands?”

@peadar coleman – probably in the same place that it said you can lend to that cohort and, regardless of risk/rules/equity/commonsense, be assured of repayment.

Ask me a hard one, next time. Or get your Swiss-based investor to do so directly.

The euro is a currency without a country. Unless we create a country it’s goodbye euro. Paul De Grauwe

The level of general macro uncertainty is very high. If the Euro breaks up the global financial system won’t be able to take it.

I saw in a recent FT video that the daily volume of FX derivatives traded via London is 5 trillion (USD?) or 4 times the level of 10 years ago. I wonder how informed the punters are.

3 examples of how well models are doing from November

“We should be concerned,” says Oleg Melentyev, a credit analyst at Deutsche Bank. “Oil dropped 25 per cent in a matter of three months and nobody was predicting it – it just happened. We don’t have a high degree of confidence to say this is the bottom, we don’t know.”

Emerging Asia’s foreign liabilities amount to nearly 50 per cent of exports, the highest level in ten years, according to data from JPMorgan. Moreover, few borrowers anticipated the surge in the dollar.

The People’s Bank of China caught many in the markets by surprise as it cut its benchmark one-year lending and deposit rates by 40 basis points and 25bp, respectively, the first easing since July 2012.

In the link below Paul De Grauwe interviews Larry Summers at the LSE on the subject of secular stagnation. Larry recommends QE and public investment projects. He goes on to state the most inportant price in any economy is the interest rate, it connects the present with the future and zero interest rates are telling us something very powerful about savings and investments. There are more savings than investment- hence a liquidity trap.
Also the UK and US gave debt reductions to Germany in the 1920s, 1930s, and 1950s. Enlightened statesmanship requires looking forwards rather that backwards and acting in everybodys interests– Germany should have a forward looking view in a common EU destiny. A crucial part of the EU strategy is a decline in the value of the euro,which will increase it’s external competitiveness with a reduction in trade surplus on the part of emerging markets.

“Question: I get that national CBs will purchase bonds and the asset side of their balance sheets will expand. How is the liability side expected to expand to match? Bank reserves? Thanks.”

A good way to think about Central Bank money printing, in accounting terms, is to pretend that there is an imaginary creditor, when cash is created by the central bank.
The accounting entries would therefore be:
Debit Cash, Credit Printing Company: (except that this is no printing company liability. It is merely an imaginary liability. The cash created ‘costs’ nothing. Equally when the ‘cash’ is handed back to the printer, it is just burnt, metaphorically speaking.)

Thereafter, the process of getting the cash to the banks via purchases, is a normal buy and sell entry.
Debit Bonds (purchased) Credit Cash or alternatively
Debit Bonds (purchased) Credit the ‘account’ of the bank in the books of the CB (which I am led to believe is the normal method).

In so far as how the CB will record the liability on their balance sheet, it will hardly be called reserves, as the QE money, in theory at least will be unwound.
ELA funding, for instance, was recorded under the heading ‘other liabilities’, which was not very helpful. IMHO, both ELA and the new CB purchases (QE) should be included under their own, or at least under meaningful categories.
The above are merely thoughts on how the system might work. Don’t bet your life on their accuracy.

@ JR

As one non (I presume) banking expert to another, you make a good point IMHO.

One could always consult an experienced practitioner of the black art of QE, of the two biggest, the Bank of England being the best example.


cf. in particular paragraph 65 of the Red Book referred to.

It is not really new, as the relevant Wiki informs me, in the context of managing monetary policy, in relation to exchange rates in particular, under the key word “sterilisation”. Fighting deflation in three of the largest economies in the world is, however, very new.


Exiting QE may be a more difficult task than starting it. It seems to have the accuracy of a Grad rocket in terms of the objective it is nominally aimed at.

The 5 year german breakeven inflation rate in december indicated the market pricing in deflation over 5 years. Italy is supposed to internally devalue faster than germany in order to be more competitive. And ponies.
Deflation makes that very unlikely. The QE plan goes nowhere near what required because so many banks are in such poor shape and won’t be recapitalised. Surely this is extend and pretend at the absolute limit.

In this July 2013 FT video Prof John Kay presents a jaundiced view of quantitative easing as a driver of economic growth:


Some Eurozone economic indicators have improved in recent times and the effective rate of exchange has fallen by 11% in the past six months.

By early 2016 we are likely to see a rise in growth from close to stagnation levels but with about two-thirds of GDP accounted for by Germany, France and Italy, growth of 2% would be an achievement.

In the 19 years 1996-2014 (euro was launched in 1999), the average Euro Area (EA18) real growth rate was 1.45% and there were 3 years: 2000, 2006 and 2007 where the rate was at 3% or higher.

World trade is falling, partly because of China’s adjustment but also because of structural factors.

Nils Andersen, head of Denmark’s AP Møller-Maersk, which carries 15% of seaborne trade, said this week that there is a trend of western European companies moving production to eastern Europe from Asia and US companies were investing either at home or in Mexico.

Emerging market demand for European goods will remain subdued and will dampen German export growth.

France and Italy are facing problems that predate the euro and will persist for years to come while the ECB’s QE will not offset the collapse in pre-2008 cross-border capital flows in Europe.

@ Michael

“France and Italy are facing problems that predate the euro”

So is the UK.
anywhere growth was based on expanding debt is facing problems, really
Japan seems to be a bit ahead of the curve on deflation, like it’s the end station.

And what a neighbourhood with N Korea and China as near neighbours.

Aer Lingus is going for the offer from IAG

Another big Irish company gets taken over. The FT Weekend edition used to have a selection of big equity caps by country- Ireland used to have 8 or 10 including Aer Lingus and of course the banks – 4 of them fell out of the rankings and now Aer Lingus is gone- there are still a few stragglers but the FT doesn’t do by country any more- it’s just the top 500 companies. And there isn’t a single Irish representative.
Very Zeitgeisty.

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