A lethal cure for the Euro by Medico Italiano

Today the ECB, overcoming the Bundesbank, opposition started its own mass money-print program called Outright Monetary Transactions (OMT). Unlike the FED's QE and "Twist" programs the European one will be with no limit. ECB will buy as much bonds as needed to keep the interest rates low. Jens Weidmann from Bundesbank announced a separate press release, calling the decision “a tantamount to financing governments by printing banknotes”.

 Draghi said this is needed to save the Euro. But it is not known a case of saving a currency by printing more and more of it. This usually destroys the currency. There is no case in history of printing money not to create an inflation. As the main function of money is to have and keep a value, so inflating money means destroying it.

 Draghi promised 2 more things in answer to these fears. He said the money issued for these bonds will be "sterilized" by withdrawing funds from the market by other means. He said also that if any country does not make reforms and fulfill its bailout plan (austerity) then the ECB will stop buying its bonds.

 But these 2 promises sound funny. ECB has no serious means of withdrawing money. It can sell other's bonds - for instance German or French ones. But ECB has no so much such bonds in its balance sheet. Additionally such selling will increase the interest rates of more reliable economies that will be far from a honest move. The other way to collect money from the market is to raise the deposit interest rates, so the banks keep more money on deposit at ECB. But in fact ECB is doing exactly the opposite - lowering these rates. If these rates are to go up, this will press all rates on markets up, including the rates on government bonds. So in fact ECB has no means of "sterilizing" the new money print.

 But even if Draghi somehow finds a way to sterilize, this will be a disastrous move for the economy. Such operation will simply mean a withdraw of money from the real economy to give it to the bureaucracy. This is a classical anti-progressive move. When more money go to government and less go to business and investments, then the economy is going bad. I.e. the fundament of long term stability will not exist. Monetary measures have a short term impact. Only the real economy can save the system in long term. In fact, if happened, "sterilizing" will be an equivalent to raising taxes to collect money from stable countries to give it to troubled countries. I.e. a secret bailout program out of EFSF/ESM. I.e. even if Draghi succeeds in sterilizing, this will not be a good economic policy. This will be a cure of one illness (money-print) with other (economy sabotage).

 Anyway more probable and almost sure is no any sterilization will occur. This is just a Draghi's eyewash to blear our eyes. ECB will simply print its trillions of Euros and OMT will become a synonym of QE.

 The second promise is also an eyewash. Draghi warns that if any country fails with bailout plan it will lose the ECB's support. But this means that ECB will have to become a firing squad that will trigger the entire social crash of the country. A country that is to use the ECB help is a troubled country almost kicked out from markets. I.e. this country will be totally dependent on ECB. The Bank will become a main and almost only creditor. Stopping this funding will mean a crash of the policy of ECB to save these countries. I.e. ECB will have to admit its own failure. Additionally in a bankrupt case, ECB will lose the money that are already invested in such bonds. So in fact ECB will never have an interest of stopping the aid... I.e. Draghi is just deluding us and winning time...

 In fact Draghi is planning nothing else than a classic money print operation, that is against the EU treaties and in break of price stability mandate of ECB. Bundesbank is clear about this and obviously is angry with it. It is interesting to see the reaction of Weidmann. If he is a man of principles the only move is to resign - just as this was done by Axel Weber and Jurgen Stark.

 ECB was projected to be a clone of Bundesbank. But now it is becoming a clone of FED. Germans have never liked the FED's dual mandate - to keep both price stability and high employment. That's why for ECB it was involved in treaties the only mandate - price stability. The other is a subject to government policy and reforms, and is not a subject of monetary policy. But today it looks as this becomes just an empty idea - a good wish, as Draghi showed.

 There is no place for Germans in this laughable situation. Weber and Stark have already created a behavior model. It's Wedmann's move.

 And soon after that - it will be Merkel's move - to resurrect the Deutsche Mark. The only wise decision for Germany today... The Euro is already just an illusion. It was intended to be the new Deutsche Mark. But obviously failed. Simply failed...

Dobri
September 6th 2012

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