Data Point: ECB Has More Room to Act
By Barry Ritholtz - May 17th, 2010, 11:00AM
I was tickled by the data point that ISI mentioned recently on the various central banks in the world.
Ed Hyman’s shop noted that since 2007, the Federal Reserve’s balance sheet has expanded +165%.
Across the pond, the European Central Bank has “only” seen their balance sheets expand a mere +70%. Therefore, concludes ISI, the ECB has a lot more potentially a lot more room to act.
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May 17th, 2010 at 11:34 am
An international financial system which lacks transversality, has no debt limits. When a currency like the USD, which is backed by over $120 trillion in exponentially expanding debt, is seen as a “safe haven”, than nothing is worth any more than the tranches in a CDO squared. Belief in the Gaussian Copula function tells us that the unreal is real.
May 17th, 2010 at 11:54 am
“. . . the Federal Reserve’s balance sheet has expanded +165%. . . . the European Central Bank has “only” seen their balance sheets expand a mere +70%. Therefore, concludes ISI, the ECB has a lot more potentially a lot more room to act.”
That’s like saying that because Elmer Fudd is “only” 7 yards over the edge of the cliff, he still has a lot more room to act, since Wiley Coyote is 16.5 yards over the edge of the cliff.
May 17th, 2010 at 12:05 pm
What was Trichet thinking when he said the current situation is as bad as WWII and possibly as bad as WWI? Too much truth serum? Was WWI worse for European finances than WWII? Maybe the post war reparations were worse. Seems like Trichet wants to make the situation worse with his commentary.
Some German pols are already calling for Trichet’s removal. They aren’t going to fund a replay of Weimar.
May 17th, 2010 at 12:35 pm
One might argue that the ECB’s constraints are more political — taking the form of severely pissed off Germans, for example.
Then there is the question of whether “austerity measures” for the Southern European countries even make sense. If Ireland and Argentina’s experiences are any guide, the IMFs austerity “medicine” is more like poison.
Or to use a slightly more grim analogy: If eurozone debt is a cancer, then the patient is simply too weak for radical chemotherapy.
At the end of the day, the political will to hold the eurozone together may not be as strong as the relentless forces pulling it apart. A massive currency devaluation is the natural next step — but such a move would vaporize the last remaining shreds of ECB credibility.
May 17th, 2010 at 12:38 pm
They could buy all the debt up and set a match to it (or I guess nowadays they just hit the delete key). All we would have then is the paper to trade with no obligations. No, that would be too easy
May 17th, 2010 at 12:47 pm
How can a country like Spain with 20% unemployment impose austerity measures? The standard reponse is to increase gov spending during a recession.
Can the German pols go their their constituents and say we need to raise taxes so Spain and the other PIIGS can deficit spend their way out of recession/high unemployment?
Except for tinfoil hat types nobody expects the US to break apart due to economic stresses but Europe is a completely different animal.
These extended periods of zero interest rates and currency prining are going to produce very painful consequences on the far side of the mountain.
May 17th, 2010 at 1:43 pm
A view from Europe: Trichet must have spent half of his time last week, explaining to all German medias,
as rktbrkr rightly pointed out, that this not Q.E, the sterilization.
You have to read the interview in Der Spiegel: the interview was on-line before being in the printed
version, rare enough to be mentioned
“A quantum leap in Governance of the Eurozone is needed”:
http://www.spiegel.de/international/europe/0,1518,694960,00.html
immediately followed, both online and in print by the following:
The hollow Euro: Specter of Inflation haunts Europe
http://www.spiegel.de/international/europe/0,1518,695111,00.html
May 17th, 2010 at 1:51 pm
HTCMSI,
to your point, see Owen Money’s, above..
the resultant Paper, used to Print the Currency, would be worth than the ‘Currency’, no matter the # of Zeroes, or the Scientific Notation involved, itself..
http://www.google.com/images?hl=en&q=Weimar+Germany+Hyperinflation&um=1&ie=UTF-8&source=univ&ei=8YHxS6OfIYP-8AaR39j9Cg&sa=X&oi=image_result_group&ct=title&resnum=4&ved=0CB8QsAQwAw
a total waste of Trees..
May 17th, 2010 at 2:03 pm
The ISI analysis is misleading — it ignores the fact that the ECB is sterilizing the purchases in the current rescue. That is, they are selling other things in order to buy the Greek etc. bonds. They could always change their minds, but under the current rules, they are not expanding the balance sheet with these purchases.
May 17th, 2010 at 2:15 pm
Sorry, I wrote before I saw today’s news that the ECB is now taking term deposits from banks in order to fund the bond purchases. This also is sterilization, but a kind that does allow expansion of the balance sheet. So yes, it is a big question for the next few days, how far they will go and whether they can stabilize bond yields of Greece, Spain, and Portugal.
May 17th, 2010 at 2:15 pm
@MEH
They wouldn’t be creating new currency. Just swapping the currency for the equivalent money stored up in the bonds. I suppose they would probably have to end the fractional reserve mechanism in order to stop the hyperinflation but if they just swapped the currency for the bonds that are floating around out there now then we would be stuck at this point of currency and that would be all the play money we would be left to play with.
No more ‘growth’ or inflation and probably some healthy deflation as productivity enhancements work their way into the system.
The way I see it, that idea couldn’t be much worse than what is now happening and it would keep the fiddlers from wrecking the system more and thus let the system heal itself naturally
May 17th, 2010 at 3:09 pm
HTCMSI,
we should wonder if that’s the case..
actual Currency in circulation, at least in the FRN zone, is a small Fraction of the amount of Claims denominated therein..
~there’s, still, less than a Tr. U$D in circulation, and ~most of that, is Overseas..
so, if the Euro/ECB scene, is similiar, then, yes, they’d be on the Zimbabwe rocket-ship, in short order..
the last thing any of ‘Central Planners’ want to see is the expected avg. Time Preference to ‘Shorten’..
there’s hyperbole, then there’s hyperbolic, bet, in the case above, on the latter..
a brief window: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Time+Preferences+hyperbolic
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Intertemporal+Preferences+hyperbolic
May 17th, 2010 at 6:01 pm
And still we have — DEFLATION. Trichet made a good comment about how Germany has NEVER had lower inflation than the last 11 years. Lowest ever.
Its amazing that the silly populace AND the ECB dont understand how big the deflation is… consider this, the first iPod cost… $499.
Today the iPad costs $499. Thats 10x deflation.
Its everywhere. Which is cool / ok because flat incomes mean much, much better standard of living. But if the govt would just print up some money (Argentina style?) all these silly “too much debt” rumblings would evaporate, banks would be solvent, promises of “pensions” and retirement benefits would balance out.
Have you seen commodity indices lately? Oil less than 50% of 2 years ago prices. Nat Gas less than 30%. Steel less than 50%. Copper down big. The ag commodities down big. Housing down 20-30%.
Central bankers are suppose to avoid deflation… which causes debt problems and depressions. Its such a simple problem to solve.
May 17th, 2010 at 6:04 pm
Deflation benefits:
a) the rich, low risk savers
b) those on fixed incomes in less dynamic segments of the economy (pensioners, all govt employees, etc)
Deflation hurts:
c) debtors and anyone on leverage (banks)
May 17th, 2010 at 8:37 pm
Except “Argentina style” didn’t work out all that well for, uh, Argentina: http://www.bloomberg.com/apps/news?pid=20601109&sid=aUcCa9tRT.7k
May 17th, 2010 at 8:46 pm
You can print all the money you want, and still not get inflation, or even save yourself from deflation. If velocity goes down quicker than money supply increases, prices still go down. Ask Japan how QE’s been working out for them.
Incidentally, the root cause of Japan’s problem is not monetary or fiscal. It is demographic. People that are getting old and dying just don’t spend like the young ‘uns, say in Arabia and sub-Saharan Africa.
May 17th, 2010 at 9:40 pm
Except Japan is a preternaturally stable case (in terms of QE not leading to inflationary chaos) because 1) the country had a lot of wealth to burn in the first place, and 2) something like 95% of JGBs are held domestically, often without individual savers even knowing it, by way of Japan’s exceptionally hidebound institutions.
When you start QE from a fiscally strapped position and a major chunk of your debt is held by foreigners — as is the case with all the PIGS except Italy — it’s a different story.
I would also add that Japan doesn’t really understand capitalism — “capitalism without bankruptcy is like christianity without hell,” as someone once said, and you also need a certain degree of creative destruction that Japan squelches for cultural / societal reasons — but that’s a whole ‘nother discussion.
May 18th, 2010 at 3:29 pm
@MEH
Should have replied sooner. Those bonds are still assets, no? You are thus trading one asset for another so there should be a tradeoff there somewhere.
This topic is now far down the list so I’ll let it go for the day but maybe we’ll crunch this discussion out somewhere down the road