QE2 : What the hell is the ECB doing?

Luhmann had his Zettelkasten. I got my Google feed.

They are not the same. Not even remotely. He spent a lifetime curating a finite conceptual collection. I am fed Big Brother’s algorithms grazing the web’s near infinity on the basis of my previous preferences.

But both produce interesting connections.

In this case my google searches for The End of (His)story  serves me US “investment advisor” Mike “Mish” Shedlock’s blog:  “What the hell…?”

I had read the FT’s “Draghi faces chorus of criticism over fresh stimulus” and heard from my Berlin contact that furious Germans accuse “Count Draghila” of sucking “our bank accounts empty”.

This picture tells the story.

So “What the hell is the ECB doing… ?”

Mish initially has “only two answers”: 1) Ignorance or 2) On Purpose.

Overall  Mish seems to suggest it is ignorance of, eg,  “… Ronald McKinnon who argued that even before interest rates fall below zero, the counterproductive feedback loops outweigh the benefits …”

But, says Mish, “… on the other hand … this is so bizarre that I have my doubts. … How stupid can things get before one starts believing something else is in play?  I had already been thinking about that question when not only did ECB president Mario Draghi further push interest rates into negative territory but he also said it was a good idea for the ECB to think about MMT.”

If I was a Keynsean economist, I could argue like The Economist that “Mr McKinnon in recent years dwelt heavily on the role of the dollar in the world financial system. In America, he took aim at the Federal Reserve’s policies of zero interest rates and quantitative easing. Here, his prescriptions were less successful. He had diagnosed the evils of negative real interest rates at a time when they were used as a policy tool independent of monetary considerations. He thought that in America, they would lead to inflation, distortions in the banking system, and reduced lending, and he argued for higher rates. In fact, inflation never took off, and bank lending was held back not by the unprofitability of loans but the lack of demand and regulatory constraints. In the last year, loan demand has recovered along with the economy.”

But I am not. I share many of Mish’s concerns about the ECB’s structure and policy (e.g. TARGETs or its targeting of banks at all). But not for the same reasons.

His reasoning appears based on faith in the invisible hand of the free money market. This assumes money is a commodity like any other.  Or at least it should be.

And indeed: “[H]ow the hell [are] Italy and Spain … going to pay off that debt?” is the primary question only if you adhere to a version of the commodity theory of money.

Not a good theory.  It simply has not got it’s head round the fact that in the age of fiat credit money, let alone  the age of 97%  , virtually all “money would disappear if everyone repaid his or her debts” (1).

And indeed Mish’s “… solution is to let the free market set interest rates rather than a tail-chasing consortium of economic wizards who have never spotted a bubble or a recession in real time.”

Not to be too pedantic about it but note that “economic wizards” are fine when, like McKinnon, they support your arguments?

“Of course, we also need to get rid of central banks and fractional reserve lending.”

Positive Money people would agree.

But then Mish asks “Got Gold?” suggesting he subscribes to a gold bug version of the commodity theory of money.

“Unfortunately, central banks will not vote to abolish themselves.”

Indeed. Nor are private banks likely to give up their privilege to create public money without massive resistance.

“It is also certain that government efforts to take direct control of money will be even worse than the actions of central banks.”

I would replace “certain” by “probable”. But to be clear: I do not share Positive Money’s faith in some “Sovereign Monetary Authority”.

Nor do I approve of MMT’s naive belief in the potential wisdom of governments to tax and spend in harmony with real resources.

Instead I argue for peoples’ QE directly to the people.

And for differential interest rates, which would see the Central Bank pay appropriate above-inflation rates to citizen savers.

Meanwhile the free money markets would continue. But with their own moneys. Not backed by any lender of last resort.

So there.

(1) Geoffrey Ingham  The Nature of Money 2004  Kindle locs 5068 + 2037

The representation of the process of money creation as balanced credits ( loans = assets that are owed to the bank ) and debts ( deposits = liabilities that the bank has to its depositors ) in double – entry form also helps us to understand the otherwise counter – intuitive conclusion that money would disappear if everyone paid their debts . That is to say , the simultaneous repayment of all loans ( assets ) would also cancel the deposits (liabilities ) on the other side of the balance sheet that are the source of money.   …

The conception of money as a social relation , rather than a thing that circulates with velocity , also directs attention to the fact that its value depends on a fundamental core , or ‘ critical mass ’ , of continuous ( re ) payments – that is , an efflux – reflux of debits and credits . Money is created and destroyed through indebtedness and repayment , as in the double – entry balance sheet . Counter – intuitively , it has been frequently observed , money would disappear if everyone repaid his or her debts … . The production of ‘ new ’ money involves the creation of new debt that is as yet unmatched by a credit reflux . Thus , the scarcity ( or abundance ) of money is a function of the willingness to contract new debt – in particular , the willingness of the issuers of the ultimate means of payment . It is widely acknowledged that a faster growth on one side of the overall complex balance sheet that comprises the monetary system is associated with changes in the value of money . For example , money appreciates in value in debt deflation when economic agents stop borrowing ( creating money ) and spending in order to restore manageable balance sheets – as in the 1930s depression and in Japan today . Conversely , the expansion of debt is widely held to lead to a depreciation of the purchasing power of money ( inflation ) ; but , as we shall see , this need not be case.