Despite the uncertainties ahead of the Greek general election, the
European Central Bank (ECB) went ahead and announced quantitative easing (QE)
of €60bn per month from March to at least September 2016.
What makes this interesting is the mounting evidence that QE does not
bring about economic recovery. Even Jaime Caruana, General Manager of the
Bank for International Settlements and who is the central bankers' central
banker, has publicly expressed deep reservations about QE.
However, the ECB ploughs on regardless.
The Keynesians at the ECB are unclear in their thinking. They are unable to
answer Caruana's points, dismissing non-Keynesian economic theory as
"religion", and they sweep aside the empirical evidence of
Keynesian policy failures. Instead they are panicking at the spectre of too
little price inflation, the continuing fall in Eurozone bank lending and now
falling commodity prices. To them, it is a situation that can only be
resolved by monetary stimulation of aggregate demand applied through
increased government deficit spending.
This is behind the supposed solution of the ECB's QE, most of which will
involve national central banks in the euro-system propping up their own
national governments' finances.
The increased socialisation of the weaker Eurozone economies, especially
those of France, Greece, Italy, Spain and Portugal, will inevitably lead to
unnecessary economic destruction. QE always transfers wealth from savers to
financial speculators and other early receivers of the new money. Somehow,
the impoverishment of the working and saving masses for the benefit of the
central bankers' chosen few is meant to be good for the economy.
Commercial banks will be corralled into risk-free financing of their
governments instead of lending to private enterprise. This is inevitable so
long as the Single Supervisory Mechanism (the pan-European banking regulator)
with a missionary zeal is discouraging banks from lending to anyone other
than governments and government agencies. So the only benefit to employment
will come from make-work programmes. Otherwise unemployment will inevitably
increase as the states' shares of GDP grow at the expense of their private
sectors as the money and bank credit shifts from the former to the latter:
this is the unequivocal lesson of history.
It may be that by passing government financing to the national central banks,
the newly-elected Greek government can be bought off. It will be hard for
this rebelling government to turn down free money, however angry it may be
about austerity. But this is surely not justification for a Eurozone-wide
monetary policy. While the Greek government might find it easier to appease
its voters, courtesy of easy money through the Bank of Greece, hard-money
Germans will be horrified. It may be tempting to think that the ECB's QE
relieves Germany from much of the peripheral Eurozone's financing and that
Germans are therefore less likely to oppose the ECB's QE. Not so, because the
ECB is merely the visible head of a wider euro-system, which includes the
national central banks, through which there are other potential liabilities.
The principal hidden cost to Germany is through the intra-central bank
settlement system, TARGET2, which should only show minor imbalances. This was
generally true before the banking crisis, but since then substantial amounts
have been owed by the weaker southern nations, notably Italy, to the stronger
northern countries. Today, the whole of the TARGET2 system is being carried
on German and Luxembourg shoulders as creditors for all the rest. Germany's
Bundesbank is owed €461bn, a figure that is likely to increase as the
debtors' negative balances continue to accumulate.
The currency effect
The immediate consequence of the ECB's QE has been to weaken the euro
against the US dollar, and importantly, it has forced the Swiss franc off its
peg. The sudden 20% revaluation of the Swiss franc has generated significant
losses for financial institutions which were short of the franc and long of
the euro, which happens to have been the most important carry-trade in
Europe, with many mortgages in Central and Eastern Europe denominated in
Swiss francs as well. The Greek election has produced a further problem with
a developing depositor run on her banks. Doubtless both the carry-trade and
Greek bank problems can be resolved or covered up, but problems such as these
are likely to further undermine international confidence in the euro,
particularly against the US dollar, forcing the US's Fed to defer yet again
the day when it permits interest rates to rise.
This was the background to the Fed's Open Market Committee (FOMC) meeting
this week, and the resulting press release can only be described as a holding
operation. Statements such as "the Committee judges that it can be
patient in beginning to normalise the stance of monetary policy" are
indicative of fence-sitting or lack of commitment either way. It is however
clear that despite the official line, the US economy is far from
"expanding at a solid pace" (FOMC's words) and external events are
not helping either. For proof of that you need look no further than the
slow-down of America's overseas manufacturing and production facility: China.
The consequences for gold
Until now, central banks have restricted monetary policy to domestic
economic management; this is now evolving into the more dangerous stage of
internationalisation through competitive devaluations. We now have two major
currencies, the yen and the euro, whose central banks are set to weaken them
further against the US dollar. Sterling, being tied through trade with the
euro, should by default weaken as well. To these we can add most of the
lesser currencies, which have already fallen against the dollar and may
continue to do so. The Fed's 2% inflation target will become more remote as a
consequence, and this is bound to defer the end of zero interest rate policy.
So from all points of view competitive devaluations should be good for gold
prices.
This is so far the case, with gold starting to rise against all major
currencies, including the US dollar, with the price above 200-day and 50-day
moving averages in bullish formation. To date from its lows gold has risen by
up to 13% against the USD, 18% against the pound, 30% against the euro, and
32% against the yen. The rise against weaker emerging market currencies is
correspondingly greater, fully justifying Asian caution about their
government currencies as stores of value.
We know that Asian demand for bullion has absorbed all mine production, scrap
and net selling of investment gold from advanced economies for at least the
last two years. Indeed, the bear market in gold has been a process of
redistribution from weak western into stronger eastern hands. So if there is
a revival in physical demand from the public in these advanced economies it
is hard to see how it can be satisfied at anything like current prices, with
physical bullion now in firm hands.
The gold price is an early warning of future monetary and currency troubles,
and it is now becoming apparent how they may transpire. The ECB move to give
easy money to profligate Eurozone politicians is likely to have important
ramifications well beyond Europe, and together with parallel actions by the
Bank of Japan, can now be expected to increase demand for physical gold in
the advanced economies once more.
