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At JSMineset.com, one commentator offers a pithy
summary of this week’s long-term refinancing operation (LTRO) measures
from the European Central Bank:
“Today the ECB provided a
nearly half trillion euro loan to European banks.
More than 500 European banks
took this 3 year loan at 1% interest.
The ECB plans to do another 3
year loan offer early next year (maybe February).
In exchange, banks are supposed
to buy Sovereign Debt from European countries. Banks can pocket the huge
differential in interest! What a Christmas present!
Jim, you said it first. Western
governments are into QE to infinity!”
Given European banks
deleveraging needs, however, sovereign bonds may not receive the bids that
some had hoped. Reuters
notes that bank analysts expect no more than €100 billion of these
loans to be used to purchase more sovereign debt from the likes of Italy and
Spain. Morgan
Stanley estimates some €20-50 billion euros of Italian bonds could be
bought. To put this in context, Italy must refinance about €150 billion
of government debt from February-April alone. Likewise, French banks are
expected to use the new loans to increase private sector lending and slow
their deleveraging, rather than as a means of buying more sovereign debt.
So while this record liquidity
injection may go a long way in terms of easing conditions in the European
banking sector, the continent’s sovereign debt difficulties remain
another matter. And while the next tranche of ECB bank loans scheduled for
early next year will be just as heavily subscribed as this week’s was
(who can say no to such cheap money?) as Reuters comments, the risk is that
banks are becoming ever-more reliant on the central bank. This sentiment was
echoed by Bank of
England Governor Mervyn King, who remarked
yesterday following a meeting of the European Systemic Risk Board in Berlin that “dependence on central
banks has risen and signs are intensifying that stressed financial conditions
are passing through to the real economy.”
In truth, markets are totally
reliant on central banks. They have arguably been so for at least the last
decade – following the decision from Alan Greenspan's Fed to target
sub-2% interest rates as a response to the bursting of the Nasdaq bubble in 2000 and the US recession of 2001-2002.
But in their endless “war” against deflationary threats and the
dreaded spectre of “internal
devaluation”, (a war in which savers necessarily become collateral
damage) central banks face the need for constant escalation of policy
responses.
This is in order to prevent
accumulated malinvestments fostered by earlier
rounds of easy money from collapsing. Each new round of monetary easing
results in a greater total of misallocated capital, which makes going
“cold turkey” that much more difficult for the economy. This
means that if a deflationary collapse is to be delayed, the next intervention
from the central bank must be even more aggressive than its previous
intervention.
So what was regarded as loose
monetary policy a decade ago becomes merely standard procedure today. This
can be seen in the way in which zero-per cent interest rates have now become
seemingly a semi-permanent part of central bank policy in developed nations,
with the Fed promising to keep rates pinned to the floor until at least
mid-2013.
Where does this end? Further
purchases of dubious mortgages, nominal GDP targeting, purchases of stocks
– perhaps even the targeting of specific levels on popular stock
indexes. None can be ruled out as weapons that central banks might deploy in
the coming years in order to support the existing (tottering) financial
edifice.
Given the market’s
sensitivity to central bank policies, it’s ironic that its missed
perhaps the most significant central bank act of the last year: amid all the
talk of how the ECB “isn’t doing enough” to
“support” the eurozone (read:
isn’t printing enough money), as ZeroHedge notes, the ECB has printed €500bn in the
last six months – more than the Fed did in all of QE2.
Despite this largesse, gold and
silver prices have been correcting since early September – which just
goes to show that as far as the markets are concerned, perception matters
just as much as reality. In this case, the perception that a
“hawkish” ECB was prepared to countenance deflation and banking
collapses in the eurozone, and that this was
bearish for gold and silver prices.
In the words of ZeroHedge:
“Ironically, the broader
"risk on" crew has not missed this, and while gold continues to be
stuck in the old paradigm, it refuses to comprehend that explicit guarantees
of trillions in debt (such as the LTRO repo operations), is an equivalent
operation to printing money.
We fully expect the correlation arbs, which usually need someone to point out the
glaringly obvious to them before they encode given relationships and
correlation pairs into buy and sell signals, will very soon comprehend why
the one most underpriced asset at this point, by orders of magnitude, is
gold.”
And on that note, we at GoldMoney would like to wish you all a very Merry
Christmas.
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