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Posts Tagged ‘European Central Bank’

The Recovery Is Stalling. We Need Pro-Market Reforms Now. | Mises Wire

Posted by M. C. on October 16, 2020

Government shutdowns have created a solvency problem with severe long-term ramifications in large parts of the business fabric. One in five companies in the UK are considered “zombies,” almost 12 percent in the United States, and more than 15 percent in the eurozone.

https://mises.org/wire/recovery-stalling-we-need-pro-market-reforms-now?utm_source=Mises+Institute+Subscriptions&utm_campaign=1bc93c725e-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-1bc93c725e-228343965

Daniel Lacalle

The Economic Sentiment Index of the European Commission for August shows that the recovery of the European economy is slowing down. Not only has the pace of recovery slowed significantly, but the data for Spain reflected evidence of being the only economy in the euro area where the index fell compared to July. If we look at the Organisation of Economic Co-operation and Development (OECD) leading indicator index, the evolution is also worrying. 60 Bloomberg also tracks the daily activity in most economies, and the evidence points to a deceleration in August in most developed and emerging economies. Only the United States seems moderately better in comparison, although the slowdown in the recovery process is also evident.

Many may say that it is normal to see a deceleration in the recovery after such a fast bounce in June and July, but when most economies’ outputs remain 10 to 20 percent below February levels after the reopening, we must be concerned. We also must warn about a rapid recovery in GDP (gross domestic product) that comes mostly from massive increases in debt and government spending. The reality is that for most businesses and households the economy remains far away from 2019 levels.

Why Such a Rapid Change in Trend?

The first and wrong analysis is usually to blame the slowdown on a bad tourist season affecting the travel and leisure sector. Of course, it is an important factor, but many other parts of the economy are showing an abrupt change in trend. Furthermore, the worsening of the indicators is clearly reflected in industry and consumer confidence, with manufacturing purchasing managers’ indexes (PMIs) slowing down in the eurozone and even entering contraction in Spain.

The forced closure of the economy by government decision and the lack of confidence in the future have a profound midterm impact on the economy.

Government shutdowns have created a solvency problem with severe long-term ramifications in large parts of the business fabric. One in five companies in the UK are considered “zombies,” almost 12 percent in the United States, and more than 15 percent in the eurozone. The Bank of Spain warns that 25 percent of Spanish companies are in a situation of technical bankruptcy and business closure.

Governments have ignored the fragility of the private sector for years, while corporate debt and solvency ratios reached new record highs. However, what is more important is that governments have not paid any attention to the weakness of the small business fabric, millions of companies with one or two employees that managed to survive day by day, that had no debt or assets and have been destroyed by the misguided and ineffective forced shutdown, not because their owners used the wrong strategies.

The excess of capacity built in the fake and indebted growth period of 2017–19 is also evident in the weak recovery. Small businesses’ death by working capital and so-called strategic sectors’ zombification through low rates and high liquidity are the collateral damage of the eternal stimulus we have seen in the post-2008 period, particularly in the European Union, where large conglomerates are viewed by governments as hidden social security systems and behave almost like state-owned enterprises in numerous cases. The August composite manufacturing index in the eurozone shows this slack. It worsened from 54.9 in July to 51.6 in August. Still expanding, but a massive slump for one month. Following the daily activity indices published by Bloomberg Economics, economic activity in the euro area is still 10 percent below February levels, and recovery slows after reopening.

The main problem is that all this occurs in the middle of the largest chain of stimuli since the creation of the eurozone. The balance sheet of the European Central Bank has soared from 39 percent of the GDP of the eurozone at the beginning of the year to 55 percent in August 2020, much larger than the balance sheet of the Federal Reserve (33 percent of US GDP) or of the Bank of England (32 percent), though still far from the monetary insanity of the Bank of Japan (120 percent). Negative interest rates, a European Central Bank that has bought more than 20 percent of the outstanding debt of most member countries, liquidity injections into the financial system via targeted longer-term refinancing operations (TLTROs), and a fiscal stimulus of almost 10 percent of GDP, yet the eurozone economy is not even close to February levels.

These stimuli do not solve a problem of solvency and falling sales. Most businesses that are closing are not doing so due to lack of access to credit or because interest rates are high (they are the opposite), or due to lack of public spending. They close because sales after reopening are nowhere near the levels needed to cover growing expenses and tax bills. Death by working capital, as I mentioned previously.

Europe and the rest of the world must learn that huge stimulus can disguise the risk of highly indebted countries with serious solvency problems but it does not solve it.

At some point we must begin to understand that periods like the current one are precisely the most dangerous. With the excuse of attending to a crisis, structural imbalances are increased while the productive sector is left abandoned.

When we read about the “support for businesses” in these stimulus packages the majority are just giving companies the opportunity to borrow more now to pay taxes in the future.

This chain of stimuli and government spending will not strengthen the economy. At best, it will zombify sectors that already had growth, productivity, and debt problems before the pandemic. There is some hope, however. Countries like France are recognizing for the first time that the measures they must take if they want to get out of this crisis are reforms that free the economy. These include serious tax-wedge and administrative reforms that attract investment, employment, and improve competitiveness. There must also be reductions of the tax burden on productive sectors, elimination of bureaucratic obstacles, reduction of so-called social charges and hiring costs, lifting of useless regulatory restrictions, incentivization of high-productivity sectors instead of subsidization of low-productivity ones, etc.

Structural reforms are urgent, but the eurozone and Japan have shifted from using monetary policy to buy time to implement those structural reforms to using such monetary stimulus as an excuse not to implement them.

Most developed economies face a dangerous dilemma: choose to follow the path of debt stagnation or strengthen the economy to exit the crisis in a stronger way. Unfortunately, the first alternative benefits a political sector that refuses to adjust, although in the medium term it destroys it by making debt and deficits unsustainable. Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

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The Importance of “Fedspeak” | Mises Institute

Posted by M. C. on May 30, 2020

At the conclusion of the Fed meeting,

Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

Fed speak for “We don’t have a clue”

https://mises.org/power-market/importance-fedspeak?utm_source=Mises+Institute+Subscriptions&utm_campaign=ea7dac162c-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-ea7dac162c-228343965

Robert Aro

The Webster’s New World College Dictionary defines “Fedspeak” as:

(informal) Impenetrable economic jargon used by the US Federal Reserve.

It’s not a condition that affects the chair of the Federal Reserve only; the wave of Fedspeak has been exhibited by members of its inner circle as well. Just last week, in a speech made to the New York Association for Business Economics, Vice Chair Richard H. Clarida said:

On March 16, we launched a program to purchase Treasury securities and agency mortgage-backed securities in whatever amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

More than $2 trillion were spent on these two asset purchases alone—a figure so large on a subject known to so few. Most will be unable to grasp what this implies for their own lives and future. When the vice chair says that the purchases help “support smooth market function,” who can stand up and ask him to succinctly define this? And further, who will challenge the assertion? How “smoothly” should a market function, and when will they know when it’s smooth enough?

The problem is that this tinkering with the money supply affects the majority of society, i.e., those who are not financially well-to-do central bankers. Ultimately, it’s those on Main Street who will pay for this intervention while buried in an avalanche of debt and stuck at home under government quarantine. Who has time to decode the reflections of a central banker? Thus, it continues. Main Street remains in the dark, guided by those who are equally blind to the principles of economics.

Fedspeak knows no bounds, as its reach has even infiltrated the European Central Bank (ECB), whose latest meeting minutes show a similar use of nebulous ideas when looking at the various risks to economic activity that the virus caused. They noted:

Attention was drawn to the fact that precautionary saving was already increasing and, if consumers did not regain confidence quickly after containment measures were lifted, there was a risk that demand would remain depressed.

The comment alludes to an ideal equilibrium that the virus has thrown off and that therefore requires intervention. Naturally, the central banker sees a problem with savings and demand, he just cannot articulate what the problem is in any discernible way. It is implied that an increase in savings and a decrease in demand, which may be partly due to a lack of confidence, pose a risk to the economy. But how much savings is too much? And how much demand is too little? This remains unknown to all except the central banker.

The Fed’s meeting minutes, also released last week, were no different. Almost as if the Fed and the ECB had had the same meeting, the Fed similarly observed that:

household spending would likely be held down by a decrease in confidence and an increase in precautionary saving.

They use these types of subjective observations, combined with data points, in order to plan the economy. Nearly imperceptibly, they justify their actions with sentences making subjective claims. The importance of Fedspeak cannot be understated. If the general public, academia, and elected officials demanded that the Fed prove how much stimulus, demand, savings, and money supply are needed to save the economy, the very existence of the Fed could be thrown into question. This would be a great thing for society, but very bad for the Fed and the economists it employs.

At the conclusion of the Fed meeting,

Members agreed that the Federal Reserve was committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With nine credit facilities already running or soon to be in place, the Fed will print as much money as possible to make sure any crisis will be contained. At that point we can only hope that the public will not be looking to the Fed for answers, partly because the Fed is the cause of the problem, but also because any explanation would amount to nothing more than “impenetrable economic jargon.”

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Central Bankers Have Declared War on Your Savings | Mises Wire

Posted by M. C. on December 2, 2019

Recently, European Central Bank (ECB) President Christine Lagarde bemoaned their surpluses, complaining that they would be better off spending the money on infrastructure and education. Desperate for a modicum of growth, Lagarde is of the philosophy that the only way to grow an economy is through government intervention.

https://mises.org/wire/central-bankers-have-declared-war-your-savings?utm_source=Mises+Institute+Subscriptions&utm_campaign=adfd4f6c6d-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-adfd4f6c6d-228343965

…Lagarde is a proponent of the NIRPs , championing the unconventional mechanism to achieve growth. Since the eurozone has barely cracked 2% GDP, many are anticipating that Lagarde will deepen negative rates during her term as president. Anytime she has mused on the subject, Lagarde has usually dismissed concerns about the saver, noting that they are also consumers, borrowers, and workers.

Unfortunately, this contempt for savers is commonplace because it is antithetical to the Keynesian approach of spending. Disciples of John Maynard Keynes will contend that consumption over saving should only happen during the bust phase of the business cycle, but if you peruse any opinion pieces by individuals subscribing to this ideology, you will only come across spending prescriptions for every type of economy – boom or bust. They dismiss the fact that capital accumulation, not consumption, creates wealth.

This myth originates from Keynes’ The General Theory and Treatise on Money, in which he posits that a saver is reducing the income of another person because he or she is not consuming the goods or services extended by somebody else. Put simply, he considered saving a self-defeating act.

“Saving is the act of the individual consumer and consists in the negative act of refraining from spending the whole of his current income on consumption,” he wrote.

The crusade against savers has been prevalent in the Democratic primary. The likes of Sen. Elizabeth Warren (D-MA) and Sen. Bernie Sanders (I-VT) have grieved about hoarders , particularly those who are the top 0.1% (no longer just the 1% anymore; likely because these two people are the 1%, too). The presidential candidates are perturbed that the supposed capital hoarders are not putting their fortunes into the economy. This is nonsense talk to justify their wealth confiscation policies, since the affluent are saving and investing, not just stuffing their money under mattresses.

Negative rates, higher taxes, and inflation – the statists are employing every measure to gain access to the fruits of your labor…

If you don’t like it, then you are out of luck. You have nowhere to go. The globalists have declared war on mom and pop savers, pillaging bank accounts and conquering our lives. Is there a chance for victory? As long as the omnipotent and iniquitous institutions remain in charge, optimism over sound economics can only fade to black.

Originally published by Liberty Nation.

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Younger Generation Will Probably End Up Poorer Than Their ...

 

 

 

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Christine Lagarde’s Move from IMF to ECB is Bad for Europe | Mises Institute

Posted by M. C. on July 6, 2019

Moving from one crime family to another.

https://mises.org/power-market/christine-lagardes-move-imf-ecb-bad-europe

Tho Bishop

Earlier today, the internet was aflutter with rumors that we were on the verge of an international crisis following schedule changes involving Russian President Vladamir Putin and Vice President Mike Pence. While it appears there two events were unrelated, a different sort of tragedy struck the international stage hours later when it was announced that Christine Lagarde had been named the new head of the European Central Bank.

Joining the ECB after a lengthy stint as head of the IMF, Lagarde certainly has the resume to be the next “great” central banker. Unfortunately, she has a record of folly which we’ve come to expect from such a title.

In the words of our friend Mike Shedlock, “It’s rare to find someone who is consistently wrong on everything. Christine Lagarde…comes close”

A conventional policymaker that fears deflation most of all, Lagarde has been a high profile defender of the negative interest rate policies we’ve seen doing damage in Europe and Japan. Her selection is being widely seen as an endorsement for continuing the policies of the outgoing Mario Draghi at a time when the ECB desperately needed a hawk to help defuse their trillion-Euro time bomb.

As Daniel Lacalle put it:

Read more: The ECB Continues to Incentivize Reckless Behavior by Daniel Lacalle

Earlier this year, Alasdair Macleod outlined the damage being done by the policies Lagarde is expected to continue.

Pumping yet more credit into the Eurozone is as effective as giving adrenalin to a dead horse. Lack of credit is not the problem. Put simply, there is a global momentum of economic contraction evolving, which any business and lending banker would be foolish to ignore. There is a developing crisis, the consequence of earlier monetary inflation in the credit cycle. Economic actors may not understand the origins of the crisis, but we can be certain they are becoming acutely aware of its looming presence. And as the crisis rapidly develops, those that require additional loans will already be insolvent.

The signal sent by the ECB to lending-bankers is likely to be misinterpreted when credit contraction is the looming threat: if TLRTO-III is the smoke, there must be a fire, possibly out of control. Better surely to call in existing loans to businesses rather than waiting to be repaid from profits unlikely to materialise. An encouragement to lend early in the credit cycle is more effective and less likely to be misunderstood than a similar encouragement later in the credit cycle. This is why a renewed TLTRO policy will almost certainly fail.

The inability of bureaucrats, with their heads buried in spreadsheets, to appreciate the role of human psychology is not the ECB’s only failing. Its executives do not even understand what interest rates represent, thinking it is simply the price of money. This is why it believes in keeping interest rates suppressed as a means of increasing credit. Earlier in the credit cycle, rate suppression does generate some credit expansion, mainly in financial rather than non-financial activities, because lower interest rates lead to higher prices for financial assets. That is basically a spreadsheet, almost non-human function. Large industrial corporations are opportunist, borrowing to fund buy-backs and to take over weaker rivals. Smaller and medium-sized business borrowers are usually offered credit only later in the cycle, when it is a mistake to accept it.

Consequently, in a zombie economy, such as that of the Eurozone, the only borrowers are wealth-destroying, socialising, debt-entrapped governments, taking full advantage of the Basel accords, which rates them for lending banks’ purposes as riskless borrowers…

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Printing Press - HISTORY

 

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IMF’s Christine Lagarde Wins EU Support to Lead European Central Bank

Posted by M. C. on July 3, 2019

In 2016, a French court found her guilty of committing negligence in 2008 when she was finance minister in the cabinet of former President Nicolas Sarkozy. The judge didn’t hand down a punishment, saying the ruling took into context the role Ms. Lagarde played in crafting France’s response to the global financial crisis. The IMF backed her, as did the French government.

Pro inflation and fiat money. Her middle name is ‘one world government’.

Her other face looks like George Soros.

The status quo will be safe. Don’t know about the citizenry that pays the bills.

https://www.wsj.com/articles/imfs-christine-lagarde-wins-eu-support-to-lead-european-central-bank-11562087529

By

Valentina Pop and
Brian Blackstone

BRUSSELS—International Monetary Fund chief Christine Lagarde is likely to become the first woman to run the European Central Bank, putting an experienced crisis fighter in charge and paving the way for a continuation of easy-money policies.

Ms. Lagarde also would be the institution’s first president without a pedigree in central banking. That has raised doubts about whether she would command the same credibility in financial markets as current chief Mario Draghi, who emerged as a dominant figure in the global economy during his nearly eight years at the ECB.

Her nomination comes as central bankers face challenges on a number of fronts. Inflation has weakened below target in many developed economies including the eurozone, while trade conflicts have crimped economic growth. But central bank rates are already super low or—in the case of Europe and Japan—negative, which spurs lending by reducing borrowing costs and making it unattractive to hold deposits…

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mark of the beast

The Mark of the Beast

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