The ECB is creating Euros even faster than Wirecard can lose them

The focus shifts today to the Euro area as there has been action on a number of fronts. Firstly the world’s second most notable orange person has been speaking at the online Northern Lights Summit. The Orangina Christine Lagarde seems to have upset the folk at ForexLive already.

Lagarde reaffirms that government debt will eventually have to be repaid

No. Just no. Governments will never run surpluses just with a snap of a finger and what is happening to the world and their debt levels now is basically what we have seen with Japan over the past two decades.

Actually before the pandemic Germany was running surpluses but the majority were not. We also got some classic Christine Lagarde as she waffled.

FRANKFURT (Reuters) – The euro zone is “probably past” the worst of the economic crisis caused by the coronavirus pandemic, European Central Bank President Christine Lagarde said on Friday, while urging authorities to prepare for a possible second wave.

“We probably are past the lowest point and I say that with some trepidation because of course there could be a severe second wave,” Lagarde told an online event.

At least she is not declaring success as Greeks and Argentinians have learnt to be terrified of what happens next after painful experience.

Also there has been this.

FRANKFURT (Reuters) – It is better for the European Central Bank to be safe than sorry when it decides whether to withdraw aggressive stimulus measures deployed to combat the fallout from the coronavirus pandemic, ECB policymaker Olli Rehn said on Friday.

“It’s better to be safe than sorry,” Rehn said. “Recall the premature rate hikes of 2011 during the euro crisis.”

This is a classic strategy where a policymaker suggests things may be reduced (yesterday) and today we have the good cop part of this simple Good Cop,Bad Cop pantomime.

Money Supply

Back on the 29th of May I pointed out that the blue touch paper had been lit on the  money supply boom of 2020. Well the rocket is lifting off.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 12.5% in May from 11.9% in April.

That compares with the recent nadir of an annual rate of 6.2% in January of 2019. Another comparison is that the rate of annual growth was around 8% before the latest phase of monetary action such as the extra Quantitative Easing of the PEPP. The weekly reporting does not exactly match a month but we saw an extra 116 billion Euros in May from it.

You will not be surprised to learn that the surge above pushed broad money growth higher as well.

Annual growth rate of broad monetary aggregate M3, increased to 8.9% in May 2020 from 8.2% in April (revised from 8.3%).

Indeed it is mostly a narrow money thing.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 8.4 percentage points (up from 8.0 percentage points in April), short-term deposits other than overnight deposits (M2-M1) contributed 0.2 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.3 percentage point (as in the previous month).

The pattern here is not quite the same as whilst the January 2019 reading at 3.8% was low the nadir is 3.5% in August of 2018. That provides some food for thought because if you apply the expected response to this the Euro area economy should have been slowing further about now. Of course the pandemic has created such a fog we cannot see one way or another about whether that held true.

There is another way of analysing this and here is a balance sheet style view.

credit to the private sector contributed 5.3 percentage points (up from 4.8 percentage points in April), credit to general government contributed 3.6 percentage points (up from 2.3 percentage points), net external assets contributed 1.0 percentage point (down from 1.4 percentage points), longer-term financial liabilities contributed 0.0 percentage point (as in the previous month), and the remaining counterparts of M3 contributed -0.9 percentage point (down from -0.3 percentage point).

I counsel caution about reading too much into this as back in the day such analysis when spectacularly wrong in the UK. Accounting identities are all very well but they miss the human component as well as some of the actual numbers. But we see growth from the government sector and the private-sector here. Also the external component has faded a bit in relative terms which provides a counterpoint to another piece of news.


From yesterday when all our troubles apparently not so far away.

Eurosystem repo facility for central banks (EUREP) introduced as precautionary backstop to address pandemic-related euro liquidity needs outside euro area….EUREP to allow broad set of central banks to borrow euro against euro-denominated debt issued by euro area central governments and supranational institutions….New facility to be available until June 2021.

These things are invariably badged as temporary but last time I checked the “temporary” income tax in the UK to pay for the Napoleonic War is still here. But as to what good it might do in a world where nobody seems to actually want Euros in this manner I am not sure. Perhaps it is a protection against another outbreak of the “Carry Trade” as this bit hints.

The provision of euro liquidity to non-euro area central banks aims at alleviating euro liquidity needs in the respective countries in a stressed market environment. The
potential beneficiaries are banks that need euro funding and are not able to obtain such funding in the market or get it only at prohibitive prices.

Although there is no real link at all to this.

Overall, these arrangements aim to facilitate a smooth transmission of monetary policy in the euro
area to the benefit of all euro area citizens

Let me help out bu suggesting replacing “all euro area citizens” with “The Precious! The Precious!”.

Here is what is presumably the official view from former ECB Vice-President Vitor Constancio. You may recall that Vitor’s job was to respond with technical questions at the ECB presser with a long involved answer that would send everyone to sleep. But at least he had a role unlike his replacement.

The ECB, reflecting awareness about the international role of the euro, just announced a new repo facility for other central banks to get euros against collateral.The FED dit it recently ..In general, the EU is finally aware of its geo-political interests.

The Fed saw demand of over US $400 billion at the peak whereas I suspect the Euro interest may be more like 0. Maybe someone will request a million or two as a test?


The relevance of the money supply changes is as follows. Narrow money supply impacts in the next 6 months and broad money in around two years. So assuming there is no Covid-19 second wave the push will impact as economies are picking up anyway. That is awkward as there is a clear inflation danger from this. There are signs of it already as we see the oil price pick up which even the neutered official inflation numbers will record. They of course miss the bit described by Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

Although we do see evidence of a type of money destruction.

Germany’s Wirecard collapsed on Thursday owing creditors almost $4 billion. ( Reuters )

The regulators are now on the case but.

All the money’s gone, nowhere to go ( The Beatles )

7 thoughts on “The ECB is creating Euros even faster than Wirecard can lose them

    • Hi Chris

      It feels a bit like closing the stable doors after the horse has bolted though.As to Bafin some of its output has been other worldly. Also there does appear to be something of a catch.

  1. As always, sterling weakens against the Euro, it doesn’t matter whether it is economic news or central bank announcing another tidal wave of money printing, when the ECB does it it doesn’t count – got that OK? When the Bank of England does it, sterling gets taken to the woodshed, since launch in 2000 the Euro has gained 50% against sterling and is now targeting 0.94 and a possible breakout to parity and beyond following the tailored hard BREXIT being lined up.

    Oh dear, whatever happened to the German constitutional challenge to the ECB’s money printing, got a few nice headlines and was soon forgotten about, since sterling always falls precipitously when stock markets fall heavily(like today), can you imagine the effect if these bubble markets implode at the same time as a hard BREXIT and the monetisation of the UK deficits, 50c for a pound if that happens.The unemployed and those on minimum wage are struggling now, if the above occurs I think those people will not be able to afford to buy food, it is that serious, foodbanks won’t cope.

  2. Interesting experiment to see how narrow M1 and broad M3/4 money act with excess production below liquidity trap levels. Broad money necessarily includes credit, so it pumps up asset prices and sucks the life out of consumption, thereby producing low growth and more excuses to expand credit and broad money.
    Narrow money is different – it can only be used for current consumption, saving or financing that M4 borrowing. So, where will it go? Obviously, it will be the usual lie about “supporting the economy”, but will it support yet more debt or go into consumption.
    At this point, behavioural finance and helicopter money become instructive. What would you do if £2k dropped through the door? Some would spend it, but mostly likely on a one-off thing (how often do quiz show winners talk about special holidays?), some would invest or save it, which is more likely in a difficult climate, thus doing nothing for consumption. Overall, then the effect of helicopter money or narrow money expansion will be limited by the Marginal propensity to save rising in tough times.
    Of course, you could emulate the Yanks and send stimulus cheques worth USD 1.4bn to dead people, who won’t be spending anything at all. 🤪

    • Or give it to total morons who open RobinHood accounts and pick shares based on Scrabbles letters, or buy shares in a Chinese company teetering on the edge of bankruptcy whose ticker just so happens to resemble FAANG the five most touted and frothy tech companies of the last ten years of totally manipulated markets Facebook, Apple, Amazon,Netfiix and Google, or subscribe to a new concept an IBO – initial bankrupt offering, Hertz were considering doing a share sale to such challenged individuals who were going to buy shares in a bankrupt company, a judge ruled that the offering was legal, then the SEC got involved and I lost the will to live………….

    • “Narrow money is different – it can only be used for current consumption, saving or financing that M4 borrowing. So, where will it go? Obviously, it will be the usual lie about “supporting the economy”, but will it support yet more debt or go into consumption.”
      Will it?
      This is the ‘opinion’ of a ‘Thatcherite Monetarist’.
      “The intention of the Bank of England’s programme of quantitative easing is to increase the quantity of money by direct transactions between it and non-banks. Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting. In its essence the mechanism at work is very simple, that the Bank of England adds money to the bank accounts of holders of government securities to pay for these securities. (The details can be of mind-blowing complexity, but need not bother us now.) Roughly speaking, the quantity of money in the UK is about £2,000 billion. Gilt purchases of £150 billion over a six-month period would therefore lead by themselves to monetary growth of about seven-and-a-half per cent or, at an annual rate, of slightly more than 15 per cent. This is a very stimulatory rate of monetary expansion.
      The objection is sometimes raised that the major holders of gilts are pension funds and insurance companies, and they will not “spend” the extra money in the shops. But the big long-term savings institutions are reluctant to hold large amounts of money in their portfolios, because in the long run it is an asset with negligible returns. At the end of 2008 UK savings institutions had total bank deposits of about £130 billion. They will be reluctant to let the number double, but — if the £150 billion were allowed to pile up uselessly — that would be the result.
      What is the likely sequence of events? First, pension funds, insurance companies, hedge funds and so on try to get rid of their excess money by purchasing more securities. Let us, for the sake of argument, say that they want to acquire more equities. To a large extent they are buying from other pension funds, insurance companies and so on, and the efforts of all market participants taken together to disembarrass themselves of the excess money seem self-cancelling and unavailing. To the extent that buyers and sellers are in a closed circuit, they cannot get rid of it by transactions between themselves. However, there is a way out. They all have an excess supply of money and an excess demand for equities, which will put upward pressure on equity prices. If equity prices rise sharply, the ratio of their money holdings to total assets will drop back to the desired level. Indeed, on the face of it a doubling of the stock market would mean (more or less) that the £150 billion of extra cash could be added to portfolios and yet leave UK financial institutions’ money-to-total-assets ratio unchanged. 
      Secondly, once the stock market starts to rise because of the process just described, companies find it easier to raise money by issuing new shares and bonds. At first, only strong companies have the credibility to embark on large-scale fund raising, but they can use their extra money to pay bills to weaker companies threatened with bankruptcy (and also perhaps to purchase land and subsidiaries from them). 
      In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive. So the monetary (or monetarist) view of banking policy is in sharp contrast to the credit (or creditist) view. Contrary to much newspaper coverage, the monetary view contains a clear account of how money affects spending and jobs. The revival in spending, as agents try to rid themselves of excess money, would occur even if bank lending were static or falling. 
      The important variable for policy-makers is not the level of bank lending to the private sector, but the level of bank deposits. (Remember Irving Fisher’s reference to “deposit currency”.) Indeed, because companies are the principal employers and the representative type of productive unit in a modern economy, bank deposits in company hands need to be monitored very closely. If these deposits start to rise strongly as a by-product of the Bank of England’s adoption of quantitative easing, the recession will be over. 

      Is quantitative easing working? Lags between economic policy and its effects are unpredictable, and celebration would be premature. Nevertheless, the first two months of quantitative easing have seen startling improvements in several areas. Most obviously, the UK stock market has soared by 30 per cent and corporate fund-raising has been on a massive scale. Anecdotally companies are saying that cash pressures are less severe. Business surveys have also turned upwards, with a key survey of the services sector suggesting earlier this month that almost as many companies planned to raise output as to reduce it. If there are more output-raising than output-reducing companies, the recession will be over. 
      The debate about quantitative easing, and the larger debate between creditism and monetarism to which it is related, will rage for the rest of 2009 and probably for many years to come. Much will depend on events and personalities, as well as on ideas and journal articles. But there is at least an argument that Bernanke’s creditism was the mistaken theory which, by a remorseless logic of citation, repetition and emulation, spread around the world’s universities, think tanks, finance ministries and central banks, and led to the Bedlam of late 2008. The monetary approach — which Bernanke himself saw as standard and traditional — argued that measures such as quantitative easing, rather than bank recapitalisation, were appropriate in September and October last year. Why were large-scale expansionary open market operations — operations targeted directly to increase bank deposits — not adopted at that stage? And would not hundreds of thousands of jobs, and thousands of businesses, have been saved if the Treasury and the Bank of England had bought back vast quantities of gilts then instead of bullying the banks? (This is not to propose that the banks are perfect and angelic. They had been silly, naughty and greedy in the years leading up to the crisis of 2008. But they tend to be silly, naughty and greedy in the years leading up to most crises, and recessions as severe as the current one are not normally visited on innocent bystanders.) 
      The academic prestige attached to the “lending-determines-spending” doctrine and other credit-based macroeconomic theories is puzzling. As noted earlier, Bernanke and Gertler included in their 1995 article an observation that comparison of actual credit magnitudes with macroeconomic variables was not a valid test of their theory. One has to wonder why. They claimed that bank lending was determined within the economy and so was “not a primitive driving force”. (In jargon, bank lending was endogenous and determined by the economy, not exogenous.) Bernanke and Gertler must have known that the relationships between credit flows and other macroeconomic variables were weak or non-existent, casting doubt on their whole approach. 😦
      In the event, their reservations about the predictive power of credit aggregates were neither here nor there. In late 2008 policy-makers were bossy and crude in their demands that the banks lend more and have enough capital to support the new loans.  More bank lending was deemed to be good, without ifs or buts. To repeat Darling’s words, “We have got to recapitalise first. You’ve got to get the expansion of lending.” Bluntly, the statistics justify neither official policy nor Darling’s hectoring and aggressive tone, while Brown’s claims to be “rescuing the world” have come to look ridiculous. In no economy are there reliable relationships between bank lending to a particular sector and activity in that sector or the wider economy. In that sense the bank recapitalisation exercises were sold on a false prospectus. 
      “Another enigma here is that the alternative view — that in the long run, national income is a function of the quantity of money — has clear and overwhelming substantiating evidence from all economies at all times. Both evidence and standard theory argue that the expansionary open market operations that are the hallmark of quantitative easing, not bank recapitalisation, should have been policy-makers’ first priority last autumn. In the next crisis they must accept that money, not bank credit by itself, is the variable, which matters most to macroeconomic outcomes.”
      June 2009

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