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"...Who suffers most
from inflation? Who suffers most from rising prices? It's the poor, not the
rich. The rich can protect themselves from inflation. Poor people can't..."
- Jean-Claude Trichet, head of
the European Central Bank (ECB)
THE
FINANCIAL TIMES just chose Jean-Claude
Trichet – head of the European Central Bank
(ECB) – as its "Person of the Year, 2007".
Okay, so Time magazine had to settle for
Vladimir Putin – the former KGB spook now
rehearsing his puppeteer skills at the Kremlin. But was the FT's short-list
really that bad? Couldn't Paris Hilton clear a space in her diary to claim
the award instead?
At least the air-head
heiress delivered as promised last year, denting only good taste in the
process. Monsieur Trichet's inflated celebrity, on
the other hand, now threatens to cost the world dear.
Trichet's No.1 task as
president of the ECB is supposed to be delivering "price stability"
to the 320 million citizens of the Eurozone (Malta
& Greek-speaking Cyprus joined the fun on New Year's Day).
Put another way, his 2.0%
inflation target means €1.00 of living expenses today should cost no
more than €1.02 by this time next year. But anyone shopping in Euros
this Christmas, however, found the cost of living 3.1% higher on average from
Dec. '06 – or so says the EuroStat agency.
Europe
For 2007 as a whole,
consumer price inflation in Europe
averaged 2.14%. But curiously, that's exactly the rate it hit in Sept. before
racing higher as Christmas drew nigh. What changed in the summer of Trichet's star year? "One of his strengths is his
ability to manage a crisis – he enjoys that," says Olivier Garnier, adviser to the ECB chief in his former life at
the French Treasury in the early 1990s. And by golly, but Trichet
got a crisis to relish this summer!
Relaxing in the sleepy
French fishing port of Saint-Mâlo, Jean-Claude Trichet awoke one
August morning to find "the first financial market crisis fought by BlackBerry from the beach" surging across the
Atlantic towards him, gushes the Financial
Times.
"As the ripple effects
of the collapsing US subprime mortgage market caused global finance to seize up, the ECB
announced it would unilaterally pump in unlimited overnight liquidity: in the
end it added almost €95bn ($136bn, £69bn)...
"Initial shock at this
unexpectedly radical intervention gave way to admiration of [the ECB's] steady hand," the newspaper goes on, hardly
able to contain its praise...
"As the drama
unfolded, the ECB appeared to be setting the pace among central banks. In the
ultimate compliment, the venerable US Federal Reserve and Bank of England
copied the tactics of an institution not yet 10 years old."
Hurrah for Trichet! Three cheers for unlimited liquidity! Hosing Paris and Frankfurt with overnight loans, Monsieur Trichet secured his place in history as "one of the
few to emerge from the turmoil with his reputation enhanced," the FT declares. He certainly helped save
the blushes of BNP Paribas, proximate cause
of the interbank lending panic when it suspended
three investment funds on 9th August after the "complete evaporation of
liquidity" in the subprime US
mortgage-bond market.
But our brave little pompier
actually hosed so much cash into Europe's money market, he's since felt the
need to mop up the puddle 14 times in the last 14 weeks, draining a total of
€390 billion in Christmas week alone.
In the 456 weeks between
the ECB's birth and October, by contrast, the Bank
only drained "excess" liquidity from Europe's money market a total of 21 times,
offering government bonds in exchange for cash.
It's a pity, in fact, that
Monsieur Trichet didn't think to take a couple of
Euros out of the market before this summer's turmoil began...
Under the European Bank's
first president, Wim Duisenberg, the ECB's open-market liquidity auctions
averaged €64.6 billion. Since "Tricky" Trichet
took over on 1st Nov. 2003 that's more than trebled to €204bn.
Indeed, our chart seems to
show how the real hosing came to end when the world's money-markets froze
back in August. But the number of ECB auctions
helped pick up the pace, reaching 7.8 on average per month vs. 5.5 averaged
per month during the preceding eight years. The average value, meantime, has
risen to €136bn from €130bn between 1999 and 2007.
Was this flood of
short-term liquidity really needed to help save the world's financial system?
Funnily enough, said Trichet himself to the
European Parliament on 19th Dec., "there has been little evidence that
the financial market turbulence since early August has strongly influenced
the dynamics of broad money and credit aggregates.
"Indeed, the expansion
of loans to households and non-financial corporations has remained robust,
which may suggest that the supply of credit has not been impaired."
No fooling, Jean-Claude!
Controlling growth of the
money supply is supposed to make up one-half of the ECB's
policy tool kit. Indeed, capping the number of monetary units in circulation
used to be the "first pillar" of the grand anti-inflation stance it
adopted at the dawn of Christendom's third millennium.
But the idea of actually
using Bundesbank-style discipline to deliver
German-style low inflation soon lost out to watching "broad economic
data" instead. Now playing second-fiddle to what Wolfgang Munchau of the Financial Times tellingly calls
"the real world view" of economic growth, consumer prices and
trade-weighted exchange rates, the ECB's initial
money-supply target – under which the broad M3 measure of liquidity
would grow by no more than 4.5% per year – has quietly slipped from the
ECB's speeches, press releases and official
statements.
Unloved and un-mentioned,
it's come to look like some ridiculous ex-spouse...still bent on sending a
Valentine's card each year but using his left hand to scrawl "Guess
Who...?" Since the Euro became flesh at the start of 2000, however,
actual growth in Western Europe's
money supply has outpaced the "reference value" by more than
one-third. It met or fell below that target for barely 10 months.
And right now the quantity
of Euros in circulation – both physical and digital – is growing
two-and-a-half times faster than the ECB's initial
prescription, taking the Eurozone back to the
runaway credit inflation of the late 1970s.
No wonder then that
"at a global level, the risks for [price] inflation are on the
upside," as Monsieur Trichet told the Bank for
International Settlements (BIS) this week in Switzerland.
No wonder either that the Gold Price in Euros has exploded as
a result. The citizens of France, Germany and Italy
saw the Gold Market scoot higher
towards €600 per ounce as Monsieur Trichet's
year of 2007 reached its end.
Will his policies at the
ECB cap inflation – and stall the surging value of Gold Prices – in
2008? Here at BullionVault, we think a
fireman hosing a burning house with kerosene would have more chance of saving
the furniture.
"There is a danger of
second-round effects on headline inflation," as the FT's Person of the Year told
the Bank for International Settlements in Basel
this week. Perhaps he was thinking of Berthold Huber – head of Germany's
IG Metall union – promising his members
"a mega year" for pay awards, starting with demands for an 8%
increase in the steel sector.
Or maybe Jean-Claude Trichet was
thinking of the six public-sector unions now threatening to strike over
higher wages & pensions in his homeland, France...or the failure of
above-inflation pay awards in Italy's public sector to prevent fresh strikes
this month...or maybe the current wage-talks in Spain, where annual pay
awards are still linked to inflation – which is currently running at
4.1% from this time last year.
In Germany,
even the very poorest workers – those who "suffer most from
inflation" according to Trichet himself in an
interview with EuroNews
last year – have come to expect an inflation-beating pay rise this
year. The Social Democratic Party is pushing for a minimum wage of
€7.50 per hour (some $11) in the world's third-largest single economy. Sharing
power with Angela Merkel's Christian Democrats in her "grand
coalition", the SDP might just force the issue, too.
Several big unions,
however, are pushing for an even greater "second-round effect" of
the ECB's failed inflation-busting worth a massive
€11 per hour (more than $16).
In short, "there is no
room for complacency [on inflation]," as Monsieur Trichet,
a former member of France's
militant PSU party, told his audience
in Basel. But what else
beyond complacency would explain the surging M3 money supply...now growing
fast enough to match the surging rate of monetary expansion in the United States and not far
behind the wanton inflation of Britain and China?
It's the poor – and
the poor middle classes, especially pensioners on fixed incomes – who
pay most when money loses its value. Top earners, led by Europe's hottest
financial hot-shots in Frankfurt
and La Defense, can look after themselves.
Not least with a flood of
central-bank money so great, it needs mopping up by the very firemen
themselves!
So for all the good he's
done defending the value of Euros, Trichet may seem
a weird choice for "Person of the Year, 2007". But for saying one
thing and doing another...and for helping the forces of inflation to mass,
even as he claimed to stand firm against them...he has corralled the spirit
of our financial age better than even Ben Bernanke
at the US Federal Reserve.
Jean-Claude Trichet, we salute
you. Truly you are the man of the moment!
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash is
head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
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