In the past week we have seen the Banks of Japan and China join the queue for printing ink along with the Fed, the Bank of England, the ECB and the Swiss National Bank; many other minor central backs have either cut rates or are about to. Admittedly the Chinese have not actually cranked up the Hewlett Packards but PBOC Governor Zhou said that “China will continue to invest in EU countries’ government bonds, and will continue, via possible channels, including the IMF, the EFSF and the ESM, to be involved in resolving the euro-zone crisis”. He added that he hopes Europe can offer “more attractive investment products”. I wonder what he has in mind. With the support he can muster Greek 2 year bonds on a 200% yield should do the trick surely…

It is abundantly clear that this concert party of central banks (not the collective noun I would normally use…) will do everything it can to keep the global financial system afloat when the inevitable happens in Greece. The ECB are about to go with LTRO 2 which should provide another €½ trillion to Europe’s beleaguered banks. Even the “mighty” HSBC is rumoured to be in the queue; not because they need it, but because it’s a ridiculously cheap form of finance that they can make a turn on and/or support their activities in the gold market…

LTRO is the acronym for Long Term Refinancing Operation. The cash they are providing is for a three year term. Since when did three years become “long term”? This must be the finest example of can kicking yet. Put the banking industry on life support whilst we try and contain the Greek fall out and leave off worrying about the consequences for a year or three!

Although we are being fed a stream of positive economic news, mainly from the US (where it is election year don’t forget…) there is a notable air of caution around and the main factor in the rise of equities so far this year has been the blizzard of cheap cash. What is intriguing is that in large corporate world, earnings are on the up (the new lean and mean machine) which is adding to their own cash piles, but they can’t find anything to spend it on. With the S&P having doubled since 2009 and being not that far short of its all time high that should hardly come as a surprise.

Apple, everyone’s favourite (is there a hedge fund out there that isn’t long?), succumbed to a bout of Newtonian gravity on Wednesday; again not unexpected given the euphoria post the iPhone 4S launch. We may yet see higher prices in equities as the printing presses continue to roll, but as the final act of the Greek farce plays out, it would be wise not to ignore the words of the Bard of Avon to “Beware the Ides of March”. www.viewfromthebridge.co.uk

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Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits.

 Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.

 The ECB has been shovelling money out to the European banks with indecent haste and their cunning plan is that those banks will then use that cash to buy junk bonds (Club Med sovereign debt) at much higher yields than the cost of borrowing. So far it hasn’t worked that way as the banks have just parked the money back with the ECB, but it has put a floor under the short end of the bond market.

 This makes the likelihood of successful bond issuances by the PIGS marginally more likely, but left the BoE wondering when the markets will wake up to the fact that our “emperor” is wearing little else than a very ragged pair of shorts. If they can keep up the illusion that the flight to safety “wings” he has tattooed on his chest will keep us airborne, they may postpone the inevitable for a time whilst attention is focussed on the rest of Europe. Technically the UK is part of Europe but then politics has rarely had any truck with mere geography…

 And so to Greece. Like many European nations the Greek government is a coalition party, but with a minority, making national unity on the issue next to impossible. Already a two day strike has been called and frankly the projections for GDP “growth” and debt repayment are utter nonsense; a point not missed by the IMF and the German Finance ministry who, let’s face it, are running the show.

 The markets meanwhile are in a sanguine mood, but why wouldn’t they be with all this central bank money sloshing around the system? If Greece was the only problem in Europe a solution would have been found ages ago, but it isn’t and we are back again to moral hazard, which I banged away about yesterday. If the Greeks get a deal then Portugal et al will be in the queue faster than the central banks can electronically print the money to pay them.

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In my formative years, moral hazard was being caught in flagrante delicto by the girlfriend’s parents. Today the principal has been abandoned for a code that allows the perpetrator of any financial “crime” the benefit of the doubt, or rather the benefit of remaining solvent at our expense. Any government’s income comes in very large part from the imposition of taxes and any form of expenditure be it bail outs, money printing and other financial chicanery gets paid from that income either now or in the future.

In the good old days of accrual accounting balance sheets were signed off as showing “true and fair value” and there was an actual number for contingent liabilities. Today “mark to market” has become “mark to unicorn”… Back in a somewhat more realistic world, if a company (even, heaven forbid, a bank!) was insolvent it went bust thereby giving a salutary reminder to investors, depositors and creditors of the maxim of caveat emptor. By creeping paralysis that principal too has been abandoned by governments and regulators who believe they are better equipped to save us from our own mistakes. The consequence (unintended or otherwise) of which is to compound the error.

Once the basic tenet of capitalism, the efficient allocation of capital, is circumvented, the virus spreads. The current wisdom is that when the patient becomes too big to fail more medicine is administered and, “Guess what?”, the patient gets bigger. It then becomes an act of faith to assume that in time the medicine will work. Viruses, like our financial systems, are highly adaptable and become immune to the antidote and ultimately kill their host, as Greece is about to find out.

It seems that economics has become like a religious experience based on superstition and myth and naysayers are tied to the stake and burnt…or worse. Keynesianism may have worked in the past (more by accident than design…) but printing money to infinity no longer does the job because the banks need this medicine – liquidity – to stay alive whilst the host, to whom the money should be flowing – the economy – is dying slowly on its feet.

Maybe Bernanke should set loose his helicopters full of cash. At least this would ensure a fairer distribution of the largesse, although being an avowed student of the Great Depression; he will know that hyperinflation comes next if he does. He will claim to be able to control inflation by employing Volckeresque rates of interest, which reached 20% in the early 80s (to control CPI at a mere 15% – hardly “hyper”) but ask yourself how much that would cost the taxpayer in terms of servicing the unfeasibly larger pile of US and other sovereign debt. Once you have worked that out you will need to break out the malt and have a sizeable dram!

But, and it’s a big but, the central banks and their acolytes have kept this ponzi scheme going for a very long while, and may well succeed to do so for some time, with the rather bizarre consequence that I may still reach a care free dotage reminiscing about the occasions on which I avoided moral hazard in my youth!

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