This is the statement that appeared on the websites of all six central banks earlier today.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.
And if you believe that you’ll believe anything. What they really mean is that the global financial/banking system is at the edge of the precipice or, in the case of large parts of Europe, already over it in true Wile E. Coyote fashion. If this were to be just a liquidity crisis and if the additional liquidity they intend to supply did end up in households and corporations then all would be just fine. But it isn’t and it won’t.
Most of this liquidity injection is for the benefit of European banks who can’t borrow to fund their day to day liabilities in the interbank market. The banks don’t want to lend to each other, even overnight, because they are terrified that one or more of them won’t be there to repay the loan in the morning. And why is this? Because most of them are insolvent. Fractional reserve banking almost guarantees insolvency when things get tough without the additional burden of holding large swathes of European sovereign debt of dubious quality.
So now that the central banks have provided yet another temporary back stop the equity markets are on a tear – “risk on” in the jargon – and the Santa Claus rally is off to a flying start. All that new liquidity that was supposed to find its way into loans to households and corporations ends up in the markets as was always the intention. This swap arrangement has been extended until February 2013 so they are buying some time but all the fundamental ills remain; sovereign debt, bank solvency, derivative obligations, economic growth, voter dissatisfaction and ever increasing government control over our daily lives “for our own good”.
When Jean-Claude Juncker said that, “When things get serious we have to lie”, maybe he should have said that we have to be economical with the economic truth. Anyone who gets a regular ear bashing from Nigel Farage deserves a miniscule degree of sympathy but certainly no more than that.
It would make a change to write about something other than Europe, but with the world looking on at this dysfunctional continent, epitomised by having a German Pope and an Italian central banker, that is much easier said than done. America and China have been consistent in their message that the eurozone needs to sort itself out, and soon, but don’t expect any handouts as they have enough problems of their own.
America is in election mode and with Republican candidates like Rick Perry and “Bunga Bunga” Cain you almost have to feel sorry for them. The only one of a sorry bunch with any understanding of the economic realities is Ron Paul yet the pro-establishment press have already written him off. The “free” press is becoming a bit of a joke; try watching the “Faux” News channel and you will see what I mean…
China, on the face of it, has few problems. Economic growth is slowing, but still forecast at circa 8% for 2012. They have a notoriously long view on most issues, but with Europe almost certainly headed for recession and the US frantically massaging the data to create a semblance of normality, they must be having some sleepless nights. To be asked to help bailout Europe so that Greek civil servants can get their pensions and banks can keep vaguely close to solvency just doesn’t translate into Chinese.
The only logical way out of this global financial mess should be to take the medicine. If you can’t pay the bills then you are bankrupt and your creditors have to take a write down. Of course once that starts the domino effect kicks in and the lights go out, but how does borrowing more make things any better, other than in the mind of a politician?
Maybe the Italians have stumbled on the answer. Replace politicians with “technocrats”. The new cabinet will not include a single sitting member of their parliament. Sounds good until you realise that most of the new ministers are either ex-bankers or have very strong connections with that murky grey industry, which would suffer the most devastating loss of power should things go dark. Milan “OWS” is already up and running as the Italians quickly realise where this is all going.
Although it is highly unlikely to be the last chapter of this story, the odds are on Germany finding a way to allow the ECB to print. The markets will be euphoric and we can all enjoy Christmas, but remember the hangover starts as usual on January 2nd. At least the evenings will be getting lighter…
Despite the Greeks managing to avoid “blowing up” their parliament for the time being, although G-Pap must be on his last legs, one wonders who will be next in the firing line. There is no shortage of candidates.
Despite the 25bps rate cut by the ECB on Thursday, Italian 10 year bond yields closed on Friday at a high for the year, having briefly blipped down on the announcement. The half-life of central bank intervention is now calculated in hours and minutes rather than weeks and months. In this case it didn’t take long for the markets to realise that “Super Mario’s” rate cut meant that American style easing was not on the agenda at the ECB confirmed by their threat to suspend purchases of BTPs (Italian government bonds); but for how long I wonder?
The head of the International Monetary Fund, Christine Lagarde, has said that Italy’s planned budgetary reforms “lack credibility” – a euphemism of the highest order – quite obviously lost on Berlusconi who has said he is very happy for the IMF to come and look at the books. Which set Silvio?
What are the options? Well the G20 didn’t come up with any apart from agreeing to bolster the reserves of the IMF…by next February; and Harold Wilson thought a week was a long time in politics! Sarkozy said, “We will fight to defend Europe and the euro,” making the typical euro-elitist assumption that everyone believes the two to be mutually inclusive; they are not! The Great ERM (exchange rate mechanism) experiment failed in the 1990s and the euro is on course for a full rinse and repeat.
One of the few actors appearing in both comedy farces is Jean-Claude Trichet in his dual roles as Governor of the Banque de France and President of the ECB. Throughout his career he has been obsessed with la stabilité du système at the expense of policies to encourage growth. Low inflation was the name of his game and in that he has prevailed, but at the cost of destabilising the whole, wretched système itself; although he would never admit to it…Gallic shrugs are now strictly limited to discussion about the rugby World cup final…If what we are seeing now is stability then his definition of a “fire” storm would make interesting reading.
Had Guy Fawkes succeeded he would have achieved what we are hankering for right now; a lot less government. Without the continual interference in our daily lives we might have avoided most of the pain that our politicians and central bankers are hell-bent on delivering. Most of them have little understanding of real world economics and pretend to know what is good for us and pass laws to make it so.
Whose effigy will be on the Greek bonfire? So many to choose from…