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March 3, 2015

$2 Trillion Euro Government Bonds At Negative Yield!

By Pater Tenebrarum at Acting Man blog  via David Stockman's Contra Corner

Mario Draghi has managed to talk the bonds of completely insolvent governments up, merely by making vague promises of doing something that sounded somewhat dodgy, even illegal. Since he never actually had to keep his promise, this must surely count as an astonishing feat in central banking history.

Convinced of his power to move markets by mere utterances, he is lately engaging in what superficially appears to be a far easier task for a central banker,  namely trying to talk down the currency the bank is issuing. Given that there is no theoretical limit to how much of its confetti a central bank can create, this should be a piece of cake. In a way this is however really a head-scratcher. Hasn’t said currency only just recently come out of intensive care? We still happen to remember news magazine covers like these:

100507 NewsweekEuropeanEditionNewsweek times an interim low in the euro …
Newsweek-juny_ARAIMA20120614_0059_1And another one …
end-of-euro-economistThe Economist didn’t want to be left out (perfect timing here as well)

Why would anyone want to talk this thing down, now that the markets have finally become convinced it is worth holding? Reuters reports that “ECB’s Draghi says appreciated euro a risk to recovery”:
“A stronger euro exchange rate is a risk to the sustainability of the euro zone recovery, European Central Bank President Mario Draghi said on Monday, while stressing that he has no plans to leave the bank. 
Draghi reiterated his position that the exchange rate is not a policy target for the ECB, but said it was nonetheless an important driver of future inflation in the euro area. 
“Certainly, the appreciation that took place since mid-2012 had an impact on price stability,” Draghi told the European Parliament’s Committee on Economic and Monetary Affairs in Strasbourg. “In the present context, an appreciated exchange rate is a risk to the sustainability of the recovery,” he added. 
The ECB has faced pressure from the French government to bring down the euro’s exchange rate, as a stronger euro risks hurting euro zone members’ exports. 
The head of planemaker Airbus, Fabrice Bregier, has also called on the ECB to take steps to devalue the common European currency to help exporters who are being hit by a strong euro.
The ECB cut interest rates to record lows last month as part of a package of measures to breathe life into a sluggish euro zone economy. Draghi said the moderate recovery in the euro zone was expected to continue but that risks to the outlook were on the downside. 
“The Governing Council is unanimous also in using also unconventional measures to address the risk of a too prolonged period of too low inflation,” if needed, he said. 
“QE falls squarely in our mandate,” he added with reference to so-called quantitative easing, or money printing to buy assets.”
(emphasis added)

More than 400 years after the erroneous doctrine of Mercantilism was first propounded (it actually goes back to the 16th century), it continues to be alive and well. Not surprisingly, it is alive and well among the world’s foremost central economic planners.

We notice with some trepidation that Mr. Draghi has also decided that after having gotten away with what one may call a highly creative interpretation of the ECB’s statutes on occasion of his “whatever it takes” promises delivered between 2011 to 2012, he continues to display this streak of interpretative creativity. As a result he seems to be threatening the poor, just rescued euro with “QE”, which is also less euphemistically known as monetizing debt by creating gobs of money from thin air, as Reuters helpfully reminds us. Everybody is doing it, he seems to be saying, so why not we? Clearly, it must “fall squarely in our mandate”.

The problem with this is that even repeated readings of the ECB’s statutes don’t reveal any mention of “QE”. However, it is clear what Draghi’s legal theory is based on: the nonsensical price stability mandate. It is no doubt better to have only this one mandate than being saddled with an employment mandate as well. However, it also means that when the prices of consumer goods are threatening to decline, making consumers salivate in anticipation, the central bank will do whatever it takes to frustrate them. In the process, it is bound to once again create dangerous bubbles. The only sensible conclusion is that the economy needs this institution like a hole in the head.

Draghi mentions he has no intentions of leaving the central bank. We happen to believe that it makes no difference who heads such an agency. The most important quality of the central bank head is therefore actually his entertainment value. The entire concept of central banking and fiat money should disappear into the dustbin of history, to be replaced by a free market for money. In case of the ECB however, not only have its powers been expanded, it is also moving into a new and rather expensive looking palace, a sure sign that the plan is to have it stick around for some time to come.

As soon as the euro got its head above the waterline, politicians and bureaucrats across the euro zone started to demand its debasement – via StockCharts, click to enlarge.

The “Logic” of  Protectionism

We notice that both the French government (no surprise there, since a more ignorance-stricken bunch of economic illiterates is actually difficult to find), as well as the head of  Airbus, Fabrice Bregier (a Frenchman as well), have called on the ECB to take steps to devalue the common European currency to “help exporters”. This represents one of the essential tenets of the Mercantilist philosophy – exporters, or domestic industry more generally, must be “helped” by debasing the coin of the realm or by assorted trade restrictions like tariffs. It is generally not mentioned that by “helping exporters”, one ends up hurting everyone else in the economy. What makes exporters so special one wonders?

All these people would benefit greatly from pondering a bit of advice by another Frenchman, who lived in age gone by, and waged valiant battles against protectionist ideas – Frederic Bastiat.

Someone should perhaps also send Mr. Draghi Bastiat’s essay on foreign trade for bedtime reading. In this essay, Bastiat takes aim at the fuzzy math of one of the protectionists of his time, a Mr. Mauguin (only the names of the Mercantilists change; their fuzzy math remains the same):

“Allow me to assess the validity of the rule according to which M. Mauguin and all the protectionists calculate profits and losses. I shall do so by recounting two business transactions which I have had the occasion to engage in. 
I was at Bordeaux. I had a cask of wine which was worth 50 francs; I sent it to Liverpool, and the customhouse noted on its records an export of 50 francs. 
At Liverpool the wine was sold for 70 francs. My representative converted the 70 francs into coal, which was found to be worth 90 francs on the market at Bordeaux. The customhouse hastened to record an import of 90 francs. 
Balance of trade, or the excess of imports over exports: 40 francs. 
These 40 francs, I have always believed, putting my trust in my books, I had gained. But M. Mauguin tells me that I have lost them, and that France has lost them in my person.
(emphasis added)

Bastiat not unreasonably concludes that what Mr. Mauguin calls “losses” should really be called “profits” and vice versa.

What the protectionists apparently don’t get: when you buy something from abroad for less than it costs you to produce it at home, you get something – namely the difference –  for free.

This difference is then available for other uses, and regardless of what it is used for  – increasing consumption, or investing in production – you are better off than  you would have been had you decided to rather produce more expensively at home.

As a general rule, national borders cannot alter the basic fact that by entering into trade voluntarily, both parties to the trade must make a gain. If that were not the case, they obviously wouldn’t do it. QED, one would think.

Of course, no-one can accuse the modern-day economic orthodoxy to be overly burdened by common sense or logic, as Mr. Draghi’s example demonstrates.  It is actually easier to understand the motives of the boss of the once heavily subsidized state-capitalistic monstrosity Airbus, who is trying to gain a privilege for his company to the detriment of everybody else (according to a WTO ruling, $18 billion in subsidy costs to tax payers had amassed as of 2011, when its ruling forced the EU to abandon the practice).

As far as consumers in the euro area are concerned, they should hope that the euro debasement plans of the bien pensants at various governments and the central bank continue to fail. Since everybody else is also trying to devalue their nation to prosperity, the debasement task is actually not as easily put into practice as it appears, so there is a small sliver of hope in spite of Mr. Draghi’s QE-related mutterings (besides, the BuBa is said to be dead set against the idea).


Believe it or not, paying less for stuff rather than more is actually a good thing. A strong currency tends to be helpful in this respect.

French economist Frederic Bastiat – definitely not a stranger to sound economic logic
(Image via Wikimedia Commons)
Courtesy Pater Tenebrarum of Acting Man via David Stockman's Contra Corner 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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