Posts Tagged ‘jens weidmann’

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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

Germany’s head central banker calls it the work of the devil. Last year, Jens Weidmann, Germany’s answer to Mervyn King, told a story from ‘Faust’. A king is running out of money, and the devil disguised as fool persuades him to solve his problem by printing new money. The result was hyperinflation. And that, says Mr Weidmann, is why QE is like the work of the devil.

It is just that QE is not really money printing at all. When the Bank of England buys government bonds it is assumed that it will sell the bonds at a future date.  So if QE looks as though it is leading to inflation, the effects can be reversed.

That’s the theory.

The reality is that that QE doesn’t seem to be doing an awful lot. Sure it may have stopped the recession from becoming  worse, but given the sheer size of this measure – £375 billion in the UK so far – it seems remarkable how low inflation is, and how tiny growth is.

The snag is that debt is the key to the banking system we have these days.  When we borrow money from a bank, we spend it and the recipient of our money pays it into a bank. So when a bank lends money, the money it lends reverberates around the economy. In this way, by their lending, banks create money.

But if we all suddenly decide to borrow less, or if banks decide they can’t afford to lend so much, the broad money supply may well contract faster than an anaconda on speed. QE has had the effect of mitigating this contraction. But it certainly has not had the effect of creating massive growth in the broad money supply.

Perhaps then it is time to really engage in money printing and hand the resulting money out across the land. Milton Friedman pretty much suggested such an idea once. He said that in times of a depression if all else fails, why not scatter money from a helicopter. Before he was chairman of the Fed, Ben Bernanke once said he thought Friedman may have been right.

But that’s where the devil comes in: wouldn’t money printing in this way just create inflation?

For that matter, this whole idea of running a large government deficit is also seen as pretty much akin to devil worship – by some.

Well, maybe. But explain why it is that in times of war – World Wars 1 and 2 for example – governments suddenly found that they could print money to fund the war effort, and could run-up huge deficits. And why is it that the post war periods were not followed by inflation, rather than economic boom, which was often the result. Sure, Germany had hyperinflation, but that was down to the Treaty of Versailles. The UK limped along in the 1920s, but that was largely because adherence to a gold standard removed the Bank of England’s ability to create money. The argument continues to say that periods in history when governments ran surpluses were invariably followed by economic depression. See: conspiracy theories, free lunches, and the theory that banks are destroying wealth .

Some go further – they say the insistence that governments run prudent fiscal policy is a conspiracy, forced upon us by banks who are trying to protect their nice little way of making money. Is the conspiracy theory right? Probably not. But the point is that there is an alternative idea to the established view. The idea suggests that instead of the money supply growing via debt created by banks, the government boosts the money supply by creating new money, and banks’ ability to create credit is then curtailed by legalisation.

The argument may or may not be right. But we may be getting an opportunity to test the theory soon.

As US politicians refuse to compromise, and Republicans and Democrats blame each other for the US’s woes, Obama may have come up with a solution.

Under US law the US government cannot print money – that job is entrusted to The Fed. Except, thanks to legislation from 12 years ago, the government is allowed to create platinum coins. The legislation was designed simply to enable the US government to create commemorative coins.

So why not make a one trillion dollar platinum coin, deposit it with the Fed, and then withdraw money against it, thereby abolishing the US government’s need to have approval from Congress before raising its fiscal debt? Friedman and Bernanke will get their money drop, and the conspiracy theorists will have their chance to put their theories to the test.

But such a measure, unlike QE, can’t be reversed. Critics say such a move really would create inflation.

Paul Krugman, the Nobel Laureate who pens a highly influential blog for the ‘New York Times’, has suggested he is in favour of the idea. But it seems he really sees this as kind of a warning shot. He doesn’t really want to see a one trillion dollar coin; rather he reckons the threat of taking such an action will be enough to ensure that the Republicans compromise with Obama.

Perhaps what we can say is that that we are seeing a very interesting development in the story of our times.

©2012 Investment and Business News.

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