What will be the policies of a Lagarde run ECB?

We face something of a new era in central banking as the announcement of the former French Finance Minister Christine Lagarde as the next President of the European Central Bank poses a problem. This is exacerbated by the fact that the former Spanish Finance Minister Luis De Guindos was appointed at the Vice-President of the ECB in March last year. So as you can see these roles seem to be becoming a nice retirement present for former finance ministers which poses a clear problem when the ECB was set up to avoid them running monetary policy!

Central banks have not always been independent, but over time there has been a clear trend towards separating monetary policy from direct political influence……… If governments had direct control over central banks, politicians could be tempted to change interest rates in their favour to create short-term economic booms or use central bank money to finance popular policy measures. ( ECB)

The spinning involved here is an example of the military dictum that the best place to hide something is in plain sight. This particularly matters if we consider the issue of QE ( Quantitative Easing ) bond buying which relies on the separation of the central bank and the treasury (treasuries in this case). Otherwise the treasury may just buy its own bonds meaning we would have a literal case of money printing.

Monetary Policy

There are three routes which will give us a clue as to what the Lagarde era will bring.

The first is the likelihood that she will inherit policy which has just been eased again. As we have been analysing the present President Mario Draghi intends to go out with something of a bang. So a further cut in the Deposit Rate from the present -0.4% is on the cards with some extra QE as well. I do not know if he got wind of the next President and decided to set monetary policy for the early part of the next term but it certainly feels like that now. Personally I find it hard to take a cut from -0.4% to -0.5% seriously as exactly is the extra -0.1% expected to achieve?

Next comes some research which was published this February whilst she was Managing Director of the IMF.

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds.

This is especially relevant to a central bank which has sailed into the next slow down with interest-rates still negative. Then the advent of something like Libra starts to look potentially rather sinister.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money.

This all seems a little odd but as Al Pacino tells us in Carlito’s Way, here comes the pain.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

It is all very involved and they do not put it like this but those with cash are being taxed. At no point does anyone question why we need such negative interest-rates? After all we have had loads of interest-rate cuts and by definition they have not worked or we would not need ever more of them. So why would this work? It plainly fails the Einstein critique which defines madness as doing the same thing but expecting a different result.

Philip Lane

Not a well known name outside of Ireland but the previous Governor of the Irish central bank is now the chief economist of the ECB. As his two superiors have little experience or expertise in monetary policy ( I recall Mario Draghi once saying he would find a job for De Guidos when they could find a job he could do….) the role of chief economist just got much more important. On Tuesday in Helsinki he updated us on his thoughts.

 As will be explained in the analysis, my assessment is that the evidence shows that our package of monetary policy measures has been an effective response to the environment that the ECB has faced in recent years.

So effective in fact that in spite of negative interest-rates and a bloated balance sheet it has slowing economic growth and inflation below target. Yet we are told everything is working just fine.

To illustrate the effectiveness of negative policy rates, ECB staff undertook a counterfactual exercise………The evidence shows that our enhanced forward guidance has been effective……According to those estimates, after the last recalibration of the APP in June 2018, the ten-year bond yield would have been around 95 basis points higher in the absence of the APP. Moreover, this impact is quite persistent……..In fact, our experience with previous TLTROs (TLTRO I and II) was that these operations had a significant effect on funding costs, particularly in more vulnerable euro area countries. Moreover, the lower funding costs were passed through to customers

Now I do not know about you but after around 5 years of something why can’t you look at what negative interest-rates have achieved rather than running a simulation? Also if lower bond yields were an economic nirvana the Euro area would be in a form of economic rapture right now. Ditto for the bank subsidy TLTROs. I suppose as Chief Economist he has to claim that people take note of Forward Guidance but I also note that even he does not claim it goes beyond financial markets. Quite how the ordinary person is supposed to respond to something they have never heard of gets omitted.

But after all the psychobabble we get the punch line. It is to be “More! More! More!”

Our assessment is that this policy package has been effective and further easing can be provided if required to deliver our mandate.


As you can see the mood music is all on one direction. Christine Lagarde headed an organisation which has pushed for higher inflation targets and even deeper negative interest-rates. It seems that her arrival will follow new QE purchases which will cause the need for more “innovation” because under the present rules there are not so many left to buy. So there are roads ahead where she will announce the buying of equities and corporate property like in Japan. Markets seem to have got the gist as I note that the ten-year yield in Germany has fallen below the -0.4% Deposit Rate of the ECB this morning. Buy bonds today and sell them to Christine later seems to be the name of the game right now.

The music must never stop even though after all this time even the most credulous must surely ask why we never seem to escape from the economic malaise?

So it is not only in the sphere of corruption that the song below from the Stranglers is appropriate.

Nice ‘N’ Sleazy
Nice ‘N’ Sleazy
Does It Does It
Does It Every Time
Nice ‘N’ Sleazy
Nice ‘N’ Sleazy
Does It Does It
Does It Every Time
Nice ‘N’ Sleazy Does It

I would imagine I am not the only person wondering how banking fraud will be dealt with on her watch?

The Investing Channel




25 thoughts on “What will be the policies of a Lagarde run ECB?

  1. Hi Shaun

    The ECB is a pathology within the pathology of the Euro.

    The notion of independence is laughable when set against the giant dysfunctionality of the Euro whose financial architecture is so deficient it is a disaster waiting to happen and always has been.

    To be fair to Draghi he’s kept the show on the road despite missteps along the way but the result is that the EZ is in a more vulnerable position than a few years ago and heading into a slowdown. This is likely to test the architecture to the limit. As Milton Friedman said you can’t rely totally on monetary policy completely but with no national currencies; interest rates set by the ECB and fiscal responses constrained by the pro cyclical Stability and Growth Pact that leaves little but painful internal devaluation as a correction mechanism. The Euro set up drives divergence not convergence and takes away the shock absorbers which mitigate the difficulties of restructuring economies or even meeting slowdowns.

    Lagarde will get up to all the tricks you suggest but lipstick on a pig means you’re still a pig and, if she does go down the accommodation route, which is certain, the only thing going for it is that it will bring on the final crisis that much quicker.

    • Id say it’ll kick the impending crisis into the future, though what this woman has been appointed to do will make the crisis they can no longer delay with central bank intervention many times worse when it finally arrives.

      The impending downturn is the one they’re looking to delay.

      Seems what we’ve had so far with QE/ZIRP/NIRP etc has just been the starter, we’re about to get to served the main course by the FED, ECB, BoE.

      If only Gordon Brown didn’t save the world in 2008, then we’d be in a far better place.

    • Ann Widdecombe seems to have upset a few remainers with her “EU Slavery remarks”


      Brexit Party MEP Ann Widdecombe has been criticised for comparing the UK leaving the EU to “slaves” rising up “against their owners”.

      She made the remarks during her maiden speech in the European Parliament on Thursday, which critics branded “disgusting” and “offensive”.

      Labour MP David Lammy described her words as “ahistorical”.

      But the Brexit Party accused Ms Widdecombe’s critics of trying to “cleanse” the English language.

      • There have been slaves since ancient times and I dare say most of them were fellow europeans hence her comments were correct. whether or not you agree with her position is an entirely different issue.

  2. Hello Shaun,

    re: “If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.” **

    this is an extremely dangerous thing to do – not that it will stop them from trying.

    This explains the war on cash , once everyone is suckered into a cashless society, they close the doors and fleece you.

    ** e-dollars – why do they think that people would convert back ? treat cash like gold ? simply make all cash notes worthless by putting them out of legal tender?

    fantasy , delusional or plain dementia ?
    ( so all they can think of is follow Japan, de ja vue all over again ! )

    politically explosive to say the least !


    • Hi Forbin

      The problem I have with that is that a £10 note has written on it.

      “I promise to pay the bearer on demand the sum of ten pounds”

      The other notes likewise for their amount. It does not say £9.70 next year and so on.

      Accordingly it would be another type of fraud.

      • … one might also argue that TPTB have already pulled an equivalent scam, by changing the “promise to pay the bearer the sum of ten pounds sterling silver” into “promise to pay the bearer the sum of ten pounds”.
        When cash/money is made worthless, then the rat-race to earn it will slow and end. As the East Germans famously said “They pretend to pay us, we pretend to work.”
        Other news. German postal charges (after a spurt of increases five or so years ago from 55c to 70c) increased from July to 80c. Just over 14%.
        Even worse, my breakfast bacon, subject to shrinkflation from 150g to 100g over the years (now with as much plastic wrapping as content) increased in price by 10%.
        The currency is devaluing at quite a pace ….

  3. Forbin,

    There is a good argument for a cashless society to deal with drugs crime and the black economy.

    The black economy on its own must defraud a massive amount of money out of an economy and in the end the honest tax payer has to make up the money.

    There are some who will say its all big brother like the cameras on our streets but if no one is doing any wrong there is nothing to worry about.

    There will still be fraud with a cashless society but far easier for the authorities to trace the money.

    • “but if no one is doing any wrong there is nothing to worry about.”

      hmm, they in charge are doing the fraud of the people – there’s little to stop them .


      • I see my post went down like a lead balloon the truth sometimes hurts.

        “hmm, they in charge are doing the fraud of the people – there’s little to stop them .”

        However I do concede to your reply and the rich are keeping the poor poorer.

        You are correct also most the people at the top very economic with the truth we and indeed the average person being defrauded one way or another.

        Despite the claim more people are in work they are worse off in real terms which has been discussed many a time on this forum.

        I do apologise my post upset anyone I was merely making a point why various governments would prefer a cash less society and some of the reasons are in fact correct.

        But I also concede joe public is being taken advantage of.

    • But it’ll be people like Lagarde, Blair, Macron and Merkel deciding what is right and what is wrong.

      Hence i will be doing things wrong, but nothing as bad as what these people have done to society.

    • If it was easy to trace fraud through banks then “Push Payment” fraud would be out of business now instead of growing like crazy.

    • Hi JRH

      She has an obvious credibility issue but I doubt that will bother her much, But I do wonder if someone will in court have the chutzpah to say they should be let off due to their “international reputation” and “personality.”

  4. Lagarde’s policies;
    Screw the Greeks
    Screw the Brits
    Screw anyone who steps out of line
    Don’t promote growth
    Don’t promote full employment
    Don’t promote more openness and democracy

    Keep everything as it is, especially my salary and perks.

    • Foxy,
      There was a time when politicians were quite dedicated to the job but Tony Blair changed that when he made millions when he moved on. Then everyone else started to do the same. Now a leader couldn’t care less whether they get voted off they just move on to far more lucrative pastures.

  5. Shaun, I remember having a little echange of views with you about MMT sometime ago. I said then that negative rates would be used like taxation in this world. It is starting to come about.
    Here we have the financial part of the centrally controlled world economy. MMT ‘money’ is showered on those that deserve it, and those investments that are required ( needless to say foremost of them are AGW inspired ones). Link this to ‘chinese-style’ credits for good behaviour and you have our BNW ‘created’.
    My mind keeps thinking of the ‘human’ blobs in Wall-E , but then being that fat certainly wouldn’t be allowed. I still think Forster in ‘the machine stops’ had it closest over 100 years ago.
    I am left wondering if I will still ( want to?) be around when this all comes to fruition.

    • ” the sharing of ideas and what passes for knowledge.”

      yup twitter feed all over that …….

      “those investments that are required” no not really ATE/ATM but I’d posit to keep the TBTF Banks “alive” ……

      interesting story though , thanks for reminding me about it .


  6. There is no good argument for a cashless society the very idea is risible. Ban cash and we’ll simply create our own. A cash ban in effect equals a totalitarian state and such power would soon be abused. On the subject of Libra I would suggest that anyone trusting Mark Zuckerberg to hold their cash has an IQ of less than a pot of yogurt. As for the ECB meet the new boss, same as the old boss don’t expect anything new.

  7. Hi Shaun,
    I’ve never seen a better example of how to make the unworkable work.

    Surely they can’t have been reading Lewis Carroll and thinking it is sound advice – When you are lost deep in the woods any path you find is a good path. You’re sure to get somewhere.

    I sometimes heard my old boss say to poor lost souls – Don’t confuse motion with progress.

    This is not going to end well, but it will end.

    It’s all very reminiscent of John Law – I seem to remember that little adventure into monetary wonderland involved the French too.

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