Posts Tagged ‘deutsche bundesbank’


It was November 2012 when Jens Weidmann, President of the Bundesbank, likened quantitative easing, or QE, to a Faustian pact with the devil.  But it was even earlier, back in 2010, when Brazil’s finance minister talked about currency wars.

It was during that era that QE was seen as leading a kind of race to the bottom, as countries fell over themselves to try and achieve a cheaper currency.  It didn’t work out like that, of course. It is no more possible for every country to have a cheaper currency then it is for every Premiership football team to win on the same day.

The critics of QE were legion. They said QE was behind currency wars, and that the inevitable result would be hyperinflation. And they saw the words of Jens Weidmann as a kind of official endorsement of that view.

It was in this environment that the buy gold bandwagon got moving. BUY GOLD, they said. It was the only safe refuge in a world gone mad under QE.

They overlooked that across the world there was a chronic shortage of demand, a savings glut and that the west was suffering from a balance sheet recession.

There are lots of things wrong with QE, the main critique might be that it is a blunt weapon. But it was never likely to lead to hyperinflation, not in a world starved of demand.

But what it did do was lead to a cheaper dollar. And when the dollar fell, so gold rose.

Back in 1999, when UK chancellor Gordon Brown sold the UK government’s gold supply, the yellow metal was trading at less than $300 an ounce. In the summer of 2009 it was trading at just shy of $900. Those two years stood either end of the great gold market, when it rose in value by around 300 per cent.

Gold continued to rise in the aftermath of the crisis of 2008. In September 2009 it was trading at $1,000 and in August 2011 it finally passed $1,900. That was when the gold hype was at its peak.

But in 2015, currency wars has turned to currency normality and inflation stands at close to zero across the developed world. QE didn’t create hyperinflation, it was not even enough to fight the threat of deflation.

In 2015 the US economy began to improve, the Fed made noises about increasing interest rates, the dollar rose, the euro fell, and gold went out of fashion.

As of this moment (21 July 2015) it is trading at $1,108 an ounce.

Why didn’t gold rise above $2,000, or even $3,000 as was once predicted? The reason is simple. QE was the not the devil’s tool it was made out to be, the global economy suffered from lack of demand.  The risk of hyperinflation was built upon a myth.

Last year Mario Draghi, president at the ECB, said the Eurozone central bank was ready to do “Whatever it takes to save the euro.” The markets loved it, and have been loving it ever since, but they forgot about the prefix, because Mr Draghi also said a few things at the beginning of the “whatever it takes statement.” In fact, he said: “Within our mandate.” That was a pretty important proviso. It is like celebrating because someone says you have done something that is good, but ignoring the fact that it was prefixed by not.

That was last summer. Now it seems that at last Super Mario Draghi has done something other than talk with prefixes that get ignored.

Yesterday the ECB voted to cut interest rates to half a per cent. So at last they are at the same level as the UK – not so long ago they were 1 per cent.

Mr Draghi said the “ECB was ready to act,” and those words got the markets all excited again.

But why has it taken so long? Inflation in the Eurozone was just 1.2 per cent in April. Across the region, and for the time being, inflation is as about as threatening as a puppy wearing a muzzle.

Well, there is an answer to the question. One ECB member voted to keep rates on hold. Jörg Asmussen, a German economist, who is normally thought of as a Draghi supporter, voted to keep rates on hold. He felt the rate cut would have little impact. Jens Weidmann, President of the German Bundesbank, held similar doubts but voted with the rest of the pack on this occasion.

So what’s next? Will the ECB really announce quantitative easing (QE)? Just remember last year Mr Weidmann likened QE to a Faustian pact. See: Quantitative Easing 

It hardly seems likely that when the topic of creating money comes up at the ECB Mr Weidmann will vote in the affirmative.

© Investment & Business News 2013

It’s been a busy week for QE. Japan hit the virtual printing press again. This time it was QE7. The latest minutes from the Bank of England’s interest setting committee implied more QE is on the cards. And you will no doubt recall that the US Fed released its latest version of QE recently. This time it said it is going to spend  $40 billion a month buying up assets, for… well it has not said for how long, just for as long as necessary.

Finally the ECB has revealed its own version of QE.

Now this may come as something of a shock, but apparently central bankers in Germany are not so keen.

And last week, Jans Weidmann, top man at the Deutsche Bundesbank, was quoting Johann Wolfgang von Goethe. That’s the German author who wrote about Faust, and pacts with devils. In one of the stories from ‘Faust’ the devil disguised himself as a fool, and persuaded the emperor, who was suffering from too much debt, to solve his problem by printing more money. The result, of course, was runaway inflation.

Now the media are paraphrasing Mr Weidmann sayng that he has called QE the work of the devil.

Meanwhile, as if to prove the German central banker right, there is a growing consensus that some extra inflation may be exactly what we need to pay down debts, without creating one mother of a depression.

It is just…

First of all, evidence that QE leads to inflation is pretty feeble. We live in a world of fractional banking, which means banks create money through their lending. For reasons we are all familiar with, banks are not keen on lending at the moment, not at all. This all means that there is a danger of the money supply contracting so fast that deflation will descend on the global economy like a giant hammer, beating down green shoots wherever they appear.

Central banks may wish to create inflation, but whether they can do so is another matter entirely.

For an individual country there is evidence that QE can be mildly inflationary, because it pushes down the value of a currency. But you can’t have all currencies falling at once. When Japan, the UK, the US and the Euro area all unleash QE at the same time, while China keeps to its policy of maintaining a link between the yuan and the dollar, the currency effect of QE pretty much gets cancelled out.

The real problem is not so much that QE leads to inflation; it is that all it really does is try to get things back to what they used to be like.

It does push down on interest rates, driving up the price of government bonds, making all other assets look cheap, forcing them to either rise, or at least not crash. Those encumbered with huge debts (or most of them) find that, thanks to low rates, they can manage to pay their way.

As a result the economy is on a kind of hold. The underlying problems that caused the crisis in 2008 are not being fixed, and so it drags on, and on.

QE’s snag is that it is it not accurate. It is the bluntest of instruments, and right now, any stimulus measure needs to be targeted.

Part of the problem is demographics, and there is no easy fix to that one.

Part of the problem is that for decades, savers have been risk averse. Money has gone into assets that do not create wealth, and not enough money has gone into supporting the ideas of entrepreneurs.

But there is another point, and that really does take us to the crux of the issue. Read on. See: In the 21st Century, taxes may need to be much, much higher.

©2012 Investment and Business News.

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