The ECB strategy review is just more of the same

This week is ECB time and this meeting is a material one on several counts. Things were revved up a bit last week by President Lagarde in interviews with Bloomberg and the Financial Times.

 we now have what I would call a simple, solid, symmetric two per cent target. So we express very firmly that we are determined to deliver two per cent. I think that is a big change.

Actually everyone thought that anyway but tucked in with it was a couple of attempts to mislead.

And maybe the really important third “s” is symmetry, because we affirm very clearly that there may be deviations up or down, either below or above two per cent and we state that we consider both deviations up or down as equally undesirable.

The new central banking mantra is to try to get inflation above target except in something of an echo of the Japanese situation there is a problem. Here is the Lagarde view.

Second, we also recognise the effectiveness of all the tools that we have in the toolbox.

Really? Let me now hand you over to Phillipe Martim a French economist in the Frankfurt Allegmeine today.

At the beginning of his theses there is a reference to “a failure” – that of the ECB. For a long time it has mostly fallen well below its self-imposed inflation target of 2 percent. “In 90 percent of the time between 2015 and today, inflation was below 1.9 percent,” states Martin; even in times of the D-Mark there was more price increase.”

Over a period in which the ECB has thrown the kitchen sink in monetary policy terms at inflation it has in general failed in its objective. Or as Phillipe puts it.

“Today the ECB already holds 25 percent of Europe’s national debt. How far should that go, about 100 percent? Will one day buy 100 percent of the Italian national debt? ”Martin emphasizes that he“ considers the worries in Germany to be legitimate ”. There is a “problem with budget discipline” when a central bank buys massive amounts of national debt. In addition, “the exit can create a crisis”.

I expect it to keep going with QE because it is caught in a trap but would advice caution with 100% numbers as there are some pension and insurance funds who have to hold bonds. So the “free float” available to be bought is probably more like 75% although we are chasing a moving target with so many being issued. As it holds around 40% ( Phillipe is behind the times) there is not the margin you might think.

But we find ourselves at the ECB probem which is that for all the hype it has a record of consistent failure regarding its inflation target. Also if you look at the growth performance of the Euro area it is in trouble too.

There was also a classic Lagarde fail.

 We are all on the same page. There’s a unanimous agreement. There is a total consensus around that foundational document, that constitution of ours.

This took us back to the early days of her Presidency when she promised to end the splits which had been seen in Mario Draghi’s tenure. Meanwhile only a day or two later.

ECB policy makers are split over changes to their language on monetary stimulus in draft documents being circulated before next week’s Governing Council meeting, sources say ( Bloomberg)

Listening To People

This has turned into something of a classic of the genre.

During the events that I participated in myself, and I heard it from other governors, key concerns revolved around, number one, climate change.

Exactly the same as Christine’s own priority. How convenient!

When it does not agree with what the ECB wants it gets neutered. So we have a good start.

The second concern that we heard loud and clear as well, was housing costs. Housing costs us a lot, we Europeans, and this was the case in many countries. Why is it not more taken into account in your measurement of inflation?

First tactic is to delay.

But second, because we know it’s going to take time,

Although as regular readers will recall we have been on this roundabout before as I followed a process which went on for 2/3 years and was then dropped. So in fact it should be quick.

But the next one is to water it down and frankly take away most of the point of doing it.

We will include housing prices through alternative indexes into our assessment of overall inflation.

The cost of owning a house, not house prices, right? 

We will include the consumption part of owning a house. So we will not include the investment part.

As you can see the interviewer saw straight through the attempt to mislead. The reason why she is dissembling is shown below.

Over the period 2010 until the first quarter of 2021, rents increased by 15.3% and house prices by 30.9%. ( Eurostat)

Deeper Negative Interest-Rates

Christine Lagarde clearly has the interest-rate issue on her mind.

given the effective low bound that we are close to, will have to continue being used.

Sadly she was not asked whether she thought it was the -0.5% Deposit Rate or the -1% rate on liquidity for banks? But we saw only a day later the ground being tilled for more,more more on her Twitter feed.

We have decided to move up a gear and start the investigation phase of the digital euro project. In the digital age people and firms should continue to have access to the safest form of money – central bank money.

Notice how it is presented as a gain for the individual which is always a be afraid, be very afraid moment. This is because it is the road to deeper negative interest-rates which Phillipe Martin would in some circumstances apply at 100%.

“If there were the digital euro, that is, the citizens had direct accounts at the central bank, that would be easy: If the money is not spent, it will expire, for example after a year.” Otherwise, prepay cards might also be distributed under certain circumstances that are invalid after one year.”

Even the IMF was only suggesting -3%.

Producer Prices

These may well be throwing another factor into the mix. From Germany earlier.

WIESBADEN – In June 2021, the index of producer prices for industrial products increased by 8.5% compared with June 2020. As reported by the Federal Statistical Office this was the highest increase compared to the corresponding month of the preceding year since January 1982 (+8.9%), when prices rose strongly during the second oil crisis. Compared with the preceding month May 2021 the overall index rose by 1.3% in June 2021.

The real issue here is the monthly increase and they turned last December and since then have been in a range between 0.7% and 1.5%. suggesting a Yazz type situation.

The only way is up baby


Christine Lagarde finds herself in quite a mess and may even have exceeded the Grand Old Duke of York.

Oh, the grand old Duke of York
He had ten thousand men
He marched them up to the top of the hill
And he marched them down again

There was a collective failure in her appointment as after the “Euro Boom” it was considered safe to appoint someone with her track record because Mario Draghi could set policy for the opening year or two. That went wrong quite quickly.

Next comes her claim of healing divisions when it appears they have multiplied. But more importantly there is the issue of policy which is in quite a mess.  There was a signal that the main policy of PEPP bond purchases would be tapered and we were pointed towards its end date of March next year. Personally I do not believe they can stop QE as last time it lasted for only about 9 months. But some believed it with the optimistic economic forecasts.

Sadly back in the real world things are looking much more awkward with the Australian Financial Review suggesting this earlier.

The Reserve Bank will likely backflip on scaling back its $237 billion bond buying stimulus and could lift weekly purchases to $6 billion, according to leading economists including Westpac chief economist Bill Evans.

Reversing that quickly would be quite a record but as Australia has the strength of its commodities to help it, are you thinking what I am thinking? The Euro area does not have that. Will last week’s plans survive until Thursday?

Markets have picked up the pace with the German ten-year going even more negative and passing -0.4% today.



How does Japan avoid inflation?

It is time again to look across to Nihon or the land of the rising sun. On the one hand it is getting ready to stage the Olympics and on the other there are a rising number of Covid-19 cases. Switching to the economics Japan must be having a wry smile at the various “tapering” debates as it has been there so many times. I stopped counting on the 19th version of QE and that was a while ago now.  They must also be a little bemused if they look south to New Zealand which looks to be planning some interest-rate rises.

Meanwhile the Bank of Japan continues on the same path. On Friday we got its latest announcement and as well as keeping the -0.1% interest-rate we were told this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

The reason I pint this out is that it has turned into an interest-rate rise of sorts, or to be more specific that 0% target stops Japanese Government Bonds from rallying past that point. This morning it was at 0.01%. This means that it has missed out on the yield falls we have seen elsewhere with the US ten-year falling by around half a point. If we switch to Germany it looked back in late May that its benchmark yield might be on its way to positive territory again is now -0.36% as I type this. This is awkward because you are doing QE because you believe lower yields give the economy a boost but then you stop the yields from falling further. Meanwhile you continue to buy JGBs on a grand scale.

In terms of the money supply the Bank of Japan has been pumping things up.

The year-on-year rate of change in the monetary
base has been positive at around 20 percent, and
its amount outstanding as of end-June was 660
trillion yen, of which the ratio to nominal GDP was
121 percent.21 The year-on-year rate of increase
in the money stock (M2) has been at around 6
percent, mainly reflecting an increase in fiscal
spending and a past rise in bank lending.

But as you can see the impulse fades considerably even before it hits measures which are influenced by the real economy.


Many countries are facing an inflation scare with the debate being how long it will last? Not Japan.

The year-on-year rate of change in the CPI (all
items less fresh food) has been at around 0
percent recently due to a rise in energy prices,

You may note that it has taken a rise in energy prices to get things to zero and zero is essentially what we have observed throughout the “lost decade” period. As someone who has a mobile phone contract which rises every year this seems typically Japanese.

a reduction in mobile phone charges.

If we drill deeper into the situation we see something else which is Japanese and here is the Bank of Japan explanation.

In the cases of the United States
and Europe, the output prices indices have
exhibited remarkable increases in tandem with
the escalation of the delivery delay indices.

As we have observed costs have risen and we tend to respond by raising prices but behaviour in Japan is different.

On the other hand, in the case of Japan, although
both the delivery delay index and the output
prices index have increased, the recent degree of
increase for both indices has been limited
compared with that in the United States and

Why is that?

The relatively small degree of rise in Japan’s
output prices index may be partly attributable to
Japanese firms’ strong tendency, at least in the
short run, to ration their products without raising
their selling prices when faced with excess

So Japan places the quantity rather than the quality ( I take price as a quality measure) game. Thus they avoid at least some of the second and third order effects of higher prices. Even when things came under what they considered to be real pressure they only saw the sort of level the UK is at now.

In this regard, in the final phase of the rise in
commodity prices in the 2000s, the year-on-year
rate of change in the CPI excluding fresh food
temporarily increased to around 2.5 percent,

Could you imagine the Bank of England ever writing this?

That said, the price change distribution at
that time shows that the rates of increase for a
majority of CPI items stayed at around 0 percent,

So even when you get the below it gets heavily watered down.

and only those for a limited number of items, for
which the raw material ratio is large, saw high
price rises of around 4-6 percent

Or as they put it.

Considering these past experiences, it seems
highly likely that the CPI inflation that merely
reflects upstream cost increases will spread to
other items to only a limited extent, and thus will
be only transitory.

So if anywhere is going to see transitory inflation then as Talking Heads put it.

I Guess that this must be the place

Wage Inflation

This used to be mostly ignored as an issue in economics because wages were assumed to rise faster than prices. That changes years and in this case decades ago as it is a feature of what we call the lost decade. Although the news has yet to reach some of the Ivory Towers.

The year-on-year rate of change in scheduled
cash earnings has been positive to a relatively
large extent on the back of (1) a rebound from the
decline seen last year, (2) rising wages of full-time
employees in the medical, healthcare, and
welfare services industry, which faces a severe
labor shortage, and (3) a fall in the share of part-time employees, mainly due to the adoption
of equal pay for equal work.

We actually have some wages growth at 2% and at first it looks good because with no inflation that is a real wages rise. Except when we look back to May last year we see that real wages fell by 2.3% so in fact we are worse off. We will find out more soon as June and July are months which are significant in bonus terms but as we stand we see that wages have continued to stagnate overall.

I do like the “sooner or later” bit below.

Special cash earnings
(bonuses), which lag behind corporate profits by
about half a year, are likely to stop declining
sooner or later, reflecting improvement in
corporate profits, and continue increasing steadily


The Japanese experience is really rather different but in a curious development often ends up in the same place as us. They have a system where many of the numbers are 0 as we look at interest-rates and yields, inflation and wages growth. If we look at the overall pattern we see that national GDP has followed not that different a path, although the individual number is better. But they have taken ZIRP and end up with it in other areas.

But the lesson here is that at least part of the inflation issue is behavioural. Care is needed as other parts of the Bank of Japan report look at the impact of the higher price for crude oil. But that is in play and Japan has seem 0% CPI and lower producer price inflation than us. In spite of this.

In foreign exchange markets, the yen has
depreciated somewhat against the U.S. dollar
amid a weaker yen against a wide range of


Digital Currencies are on their way accompanied by negative interest-rates

The issue of a digital currency is something that is increasingly occupying both the minds and the attention of central bankers. This morning has given another example of that because as I was about to look at a couple of developments this appeared on the news wires.

Hong Kong monetary authority says it will explore issuing an e-HK dollar ( @PriapusIQ )

It would be simpler if we got a list of central banks that are not looking at it! They all have the two main drivers for this. The first is that digital currencies provide a challenged to the banks or as central banks see it “The Precious! The Precious!”. The next is their fear of the consequences of what they call the lower bound for interest-rates. Whilst this has clearly got lower to the embarrassment for example of Governor Carney of the Bank of England who assured us several times it was 0.5% in the UK and then helped to reduce it to 0.1%. There are fears in the central banking community that many have got close to if not at as low as they can go. There is a reason the ECB has not cut its deposit rate below -0.5%. So we move onto their plans for in some cases negative interest-rates in the next recession ( UK) and deeper ones ( Euro area)

Money Money Money

The issue here is the role of banks in the creation of money. Here is the Bank of England explaining this yesterday.

In the modern economy,most money takes the form of bank deposits. The principle way these deposits are created is through commercial banks creating loans.

We see here much of the reason for the central banking view that banks are “The Precious! The Precious!” and it continues.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. For example, when a bank extends a mortgage to someone to buy a house, it does not typically do so by giving them thousands of pounds of bank notes. Instead, it credits their bank account with a bank deposit the size of the mortgage. At that moment money is created.

It is revealing I think that that they choose a mortgage as an example rather than business lending. But the real point here is the vital role of banks in most money creation in our monetary system. It is this that is the real “high powered money” rather than the version in the theories of economics text books which focused on central banks. If that had been right QE would have launched economies forward and we would not be where we are.

Banks are not limited as many think by some rule in the form of a money multiplier. The UK has not had anything like that for some decades. There is a limit from this.

Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.

Although that has had quite a bit of trouble as banks have in modern times struggled to make much if any profit at all. They have required quite a bit of help and some collapsed quite spectacularly with large losses. Another potential limit is prudential regulation which as I am sure you have spotted ties the banks ever more closely to the central bank.

In some ways the main restriction these days comes from us.

for instance they could quickly “destroy” money by using it to repay their existing debt.

This has been happening in the world of UK unsecured credit as highlighted a few days ago.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion).

It is rarely put like this but money has been “destroyed”. How very dare they! Won’t anybody think of The Precious?

For a central bank replacing this with Facebook’s currency or one from any of the other tech giants in existence or about to start does not bear thinking about. It may even have been a string factor in the new apparent enthusiasm for taxing them.

Negative Interest-Rates

This is the fantasy world of central bankers thus we find that the road to negative interest-rates is described as one with higher ones.

In response to deposits migrating to new forms of digital money, banks are assumed to compete for deposits. And they do this by offering higher interest rates.

Actually Bank of England policy ( Funding for Lending Scheme and the various Term Funding Scheme’s) has been designed to avoid this for some time. Indeed this has not really happened since our favourite Charlie Professor Sir Charles Bean promised it back in September 2010.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually Sir Charles has done really rather well adding the Office of Budget Responsibility and a Professorship at the LSE to his RPI-linked pension. Savers meanwhile have been stuck on the roundabouts.

Returning to its scenario the Bank makes various assumptions which lead us to this.

The interest rate banks pay on long-term wholesale funding is typically higher than on deposit funding. Other things equal, replacing lost deposits with more long-term wholesale funding therefore implies an increase in banks’ overall funding costs.

This leads us to banks charging more which many people will be familiar with. After all banks are perfectly capable of managing that without all the assumptions and intellectual innovation displayed in the discussion paper.

Under this assumption, both funding costs and bank lending rates rise by around 20 basis points.

In fact a 0.2% increase on overdraft rates which these days are 30% plus would hardly be noticed nor on credit cards. Commercial borrowing is something that may act differently mostly I think due to scale.

Under the illustrative scenario, it is assumed that some corporate borrowers find it cheaper to take advantage of credit opportunities in the non-bank sector. For example, medium-sized UK companies who were previously unwilling to accept costs associated with non-bank sources of credit, but who now find it cheaper to do so than borrowing from a bank.


This is another step on the road to ever lower interest-rates combined with central bankers twisting and turning to find a future for the banks. This is because the system as it stands suits them both.

Monetary policy is mainly implemented by setting the interest rate paid on reserves held at the central bank by commercial banks. This interest rate is known as Bank Rate.

Or at least that is their view because as we look around we see that it has in fact become less and less relevant.

Towards the end of the paper – and thus less likely to be reported- we end up at our destination though.

If it was preferred to cash, a central bank digital currency could also soften the lower bound on monetary policy.

Here is the Bank of England version of this.

In principle, a CBDC could be used, in conjunction with a policy of restricting the use of cash. If the interest rate on the CBDC could go negative, this could soften the effective lower bound on interest rates and lower the welfare loss associated with the opportunity cost of holding cash.

Actually you just set an exchange-rate between the two as the IMF suggested and Hey Presto! You have -2% or -3% and a strict form of financial repression.




Secretary Yellen shifts the fiscal policy goal posts

The weekend just gone brought with it a clear hint of economic policy ahead. It came from the US Treasury Secretary Janet Yellen who is in the process of making something of a transition. Like Mario Draghi in Italy she is making the switch from supposedly independent central banker to politician. Both as they have emerged from their chrysalis have become advocates for fiscal policy but Janet is taking things a step further.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

She has clearly gone further than this below which we had become used to.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

So as well as the fiscal plan to get the US economy going again we can expect “More,More, More” from the Biden administration. Indeed in her replies to the press Secretary Yellen offered the same prescription to everyone else.

And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that.

This is a challenge to what we were told at the end of last month by the President of the German Bundesbank Jens Weidmann.

“It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Indeed Jens then if anything went further here.

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal.

A Worldwide Move

As well as the promises of US action and urges for other developed nations to do the same there was this.

The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used.

There is a merging of monetary and fiscal policy here. At the start this is an expansion of the world money supply via an increase in SDRs. But it will quickly become fiscal policy as the IMF spends the funds that have just been raised. Politicians love this sort of thing because it is near to a “free lunch” they will get because there is no-one with any ability to object such as those pesky voters.

We wait to see how much of an increase there will be in this.

So far SDR 204.2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The US Treasury has previously suggested this.

To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.

As you can see it would be quite an expansion and perhaps at some point they will key us know who needs global reserve assets? Apart from them of course.

Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis

Back in the USA

Before we reach the international environment there are a couple of elephants in the room as we note the subject du jour appearing again.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further.

Which got this response.

SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent.

If she is a De La Soul fan then there is some logic to this.

That’s the magic number
Yes it is
It’s the magic number

But in reality she is trying to get away with as small a number as she can. Also I am sure you were all waiting for this bit.

But I personally believe that this represents transitory factors.

As everything ends she will be right but we may all be poorer well before then. Also she seems to be doing some cherry-picking.

 without affecting the underlying inflation rate

Like house prices which do not appear in either of the 2 main inflation measures? Ignoring something rising at over 10% per annum and replacing it by something rising at more like 2% helps you tell people inflation is low. The problem comes when they have to actually pay their bills.

In essence Secretary Yellen is saying the US government is targeting this.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic.

The catch is the assumption that fiscal policy fixes all ills. No doubt some will benefit but if the numbers are a result of structural changes in the economy others may not.


When interviewed by Bloomberg Secretary Yellen gave a different perspective.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.

This is an issue we looked at on the 5th of May when Secretary Yellen also seemed to think she still had her old job as head of the Federal Reserve. Actually whilst we did see a shift upwards in bond yields earlier this year they have if anything retraced a little in the last couple of months.


There is a clear attempt here to open a path to more expansionary fiscal policy outside the US. Whilst it does not get a mention ( with may be very revealing) this is an issue for a fiscal stimulus.

The U.S. monthly international trade deficit increased in March 2021 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $70.5 billion in February (revised) to $74.4 billion in March, as imports increased more than exports.

Expansions elsewhere and hence more demand for US exports would help with this.

The next issue is inflation as we get told that any response will be too late.

And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

It looks as though we will be discussing the fiscal multiplier ( how much bang you get for your buck) quite a bit over the next year or two.



Japan is struggling with its economy and coronavirus as well as the Olympics

The Coivd-19 pandemic has highlighted many of the issues we have been noting in Japan in its “lost decade” period which now of course has run for decades. The most recent has been a growing list of countries recording low birth rates which reminds us of Japan and its issues with that an consequently demographics. Next comes the increasing use of QE ( Quantitative Easing) bond buying around the world which echoes the behaviour of the Bank of Japan.That leads into increased public-sector borrowing and high levels of public-sector debt where Japan is something of a leader of the pack. For the more thoughtful there is also something which was true even pre pandemic which is that economic growth was catching a bit of the Vapors even before Coivid-19 hit.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

That is an issue once the pandemic is over as we wait to see if the developed world continues to find economic growth hard to find. But for the moment let me point out another feature of Japanese life which is a contradiction to stereotypes but is so often true.

Hospitals in Japan’s second largest city of Osaka are buckling under a huge wave of new coronavirus infections, running out of beds and ventilators as exhausted doctors warn of a “system collapse”, and advise against holding the Olympics this summer. ( Reuters)

Mask wearing was not unusual when I worked out there in the 1990s so you might think they were equipped to keep things relatively under control. But as the vaccine scheme shows it has not worked out like that.

Japan opened large-scale vaccination facilities on Monday morning in Tokyo and Osaka Prefecture. Officials say they aim to inoculate Japan’s 36 million seniors by the end of July. ( NHK)

That all seems rather tardy especially for a country planning to host an Olympics in a couple of months as NHK goes on to point out.

A woman said she felt like she has had to wait a long time to get her vaccination compared to other countries, and they could have started earlier.

Also even the new effort looks to leave them short of the target above.

The Tokyo facility will administer 5,000 shots a day, while the one in Osaka will give out 2,500. The government says it hopes to double their combined capacity in the future.

Sop rather like with the nuclear power programme Japan trips up when you think it should be in an area of strength.

The Economy

Last week we were told this via Japan Today.

Japan’s economy contracted 1.3 percent in the three months to March after the government reimposed virus restrictions in major cities as infections surged, data showed Tuesday.

We can use this to look back.

Japan’s economy registered its first annual contraction since 2009 last year, reeling from the effects of the pandemic despite experiencing a smaller outbreak than many countries.

Revised figures released Tuesday showed the annual contraction was marginally better than initially estimated, at -4.7 percent, from the earlier -4.8 percent figure.

Regular readers will be aware that the 2020 fall came on the back of an economy that was already struggling because of the latest rise in the Consumption Tax.

Unlike many other places Japan may well be turning lower again this quarter.

Economists warn that the slowdown is likely to continue, with the government forced to impose a third state of emergency in several parts of the country — including economic engines Tokyo and Osaka — earlier this month.

The emergency measures are tougher than in the past, and have been extended to the end of May and expanded to several other regions in recent days.

Thus domestic demand may see its largest pandemic hit so far. There is also the debate over the Olympics which is already a year late. Will it happen? Due to the concept of face I expect Japan to do everything it can to hold it but if it cannot a lot of spending has been wasted. Then for a manufacturing economy there is this too.

Oshikubo also noted that a global semiconductor shortage caused by surging demand for chips used in personal electronic devices and modern vehicles remains a risk.

“We expect choppy waters ahead for manufacturing in the next quarter,” he warned.

Business Surveys

The IHS Markit survey on Friday was not optimistic.

Flash PMI data indicated that activity at Japanese private sector businesses saw a renewed reduction in May. Output fell at the quickest pace for four months, while the contraction in new business inflows was the fastest since February.

There was growth in manufacturing ( 53.1) but the decline in services ( 45.7) pulled the overall economy into decline. This leaves the Bank of Japan in a bit of a cleft stick because only a few days ago Governor Kuroda told us this.

Thereafter, as the impact of COVID-19 subsides, it is projected to continue growing. After having registered a significant negative figure of minus 4.6 percent for fiscal 2020, the real GDP growth rate is projected to be 4.0 percent for fiscal 2021, 2.4 percent for fiscal 2022, and 1.3 percent for fiscal 2023 in terms of the medians of the Policy Board members’ forecasts in the April 2021 Outlook Report. Compared with the previous Outlook Report released in January, the projected growth rates are higher, mainly for fiscal 2022.

So it has revised things up just as the situation gets worse.

Monetary Policy

In essence the Bank of Japan has set all official interest-rates between -0.1% overnight rate and the 0% target of yield curve control for the Japanese Government Bond market. There has been a modification because during the peal of the crisis YCC was holding bond yields up rather than pushing them down so we now have a range.

The Bank made clear that the range of fluctuations in long-term interest rates, or 10-year JGB yields, would be between around plus and minus 0.25 percent from the target level, which is set at “around zero percent.”

That was quite a defeat for the central planning philosophy because if you spend some 536,666,804,633,000 Yen on something you are planning to raise the price rather than reduce it.

Moving onto equity buying the official view is this.

The third policy action concerns ETF and J-REIT purchases. These purchases aim at exerting positive effects on economic activity and prices by lowering risk premia in the markets

If so what is going to do now the Nikkei-225 index is at these levels as today it closed at 28.364? What will be done with the 36 trillion Yen that has already been bought?


There are tow numbers which we can use to look at Japan and the first is inflation where policy is for example to raise mobile phone costs.

Compared with the previous report, the projected rate of increase in the CPI for fiscal 2021 is lower due to the effects of the reduction in mobile phone charges.( Governor Kuroda)

The aim to increase inflation to 2% per annum is never explained apart from being an international standard and has been widely ignored in Japan as inflation has been dormant during the lost decade period.

There is a counterpoint which is that Bank of Japan policy switched via QE ( now called QQE) to boosting asset prices such as equities and bonds. The latter helps oil the wheels of all the debt.

Japanese government debt rose ¥101.92 trillion ($940 billion) in fiscal 2020 to a record ¥1.2 quadrillion, showing the largest annual increase as a result of the fiscal response to the coronavirus pandemic, according to the Finance Ministry.

Marking a record high for the fifth straight year, the outstanding balance as of March 31 means that debt per capita stood at ¥9.70 million based on the estimated population of 125.41 million on April 1. ( Japan Today)

The debt burden is not one of increased interest costs as the Bank of Japan has seen to that. But the total which according to the IMF will be 256.5% of GDP this year is an issue when we note that the population and in particular the working age population is declining. Also there are areas where it plans to spend more.

Japan to end its 1% GDP cap on defence spending – “must increase our defense capabilities at a radically different pace” ( ForexLive )


What can the ECB do for the economic prospects of the Euro area?

The focus switches today to the Euro area and the ECB. This is not only because we wait to see if ECB President Lagarde will make yet another gaffe but because things changed in the central banking space somewhat yesterday. So let us take a journey across the Atlantic to Canada.

Our forward guidance continues to be reinforced and supplemented by our quantitative easing (QE) program. We decided to adjust the program to a target of $3 billion weekly net purchases of Government of Canada bonds. That is down from a minimum of $4 billion per week, while we will be maintaining broadly the same maturity composition of our purchases.

As you can see the Bank of Canada has decided to trim or taper its bond purchases. That is far from unique as for example the Bank of England has reduced its weekly purchases along the way to the present £4.4 billion, but it does contrast with the ECB.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

That was from the last press conference on the 11th of March. However in spite of a long and convoluted explanation from President Lagarde nobody seems to have told the bond buyers. So here is @fwred on this week’s numbers.

Aaand another NOT significant net weekly ECB PEPP number (€16.3bn purchases per week, or €3.3bn per day, in line with the old normal regime). We’re all in for the jokes and nuances, but this is becoming an embarrassment, and an issue for the ECB’s credibility.

Some have responded by pointing out that the gross purchases at over 28 billion were the highest since last June. But that is not really the metric and anyway you know which bonds are going to mature by simply looking at the calendar. So we end up Genesis.

Can’t you see this is the land of confusion?

It goes without saying that this is another Forward Guidance fail where more purchases were promised but have not happened. In the meantime other central banks have begun to move in the other direction! Although this exposes another issue as the ECB cannot issue an economic forecast like this.

Overall, we now project that the economy will expand by around 6½ percent this year, slowing to about 3¾ percent in 2022 and 3¼ percent in 2023.

So we have an awkward situation for the ECB. There are nuances here as the Bank of Canada is partly responding to a roaring housing market

While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour.

Also it has an economy being boosted by higher commodity prices including lumber. But whichever way the ECB twists here it has trouble.


This is another issue again highlighted by the Bank of Canada.

. Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.

So we could see an interest-rate increase then. I say could because central banks pursue plans for interest-rate cuts with far more enthusiasm than rises. But the ECB has a deeper issue which is that it did not raise interest-rates even in the Euro Boom of 2017/18. Is it trapped in the icy cold world of negative interest-rates? It has not raised interest-rates for a decade now.

Economic Outlook

Today has brought a couple of hints and it started in the Netherlands.

In February 2021, consumers spent 10.7 percent less than in February 2020, reports the CBS. The contraction is smaller than in January, when consumers spent 12.0 percent less than a year earlier. As in previous months, consumers spent less on services. With the closing of all non-essential stores on December 15, spending on durable goods also shrank exceptionally. ( Netherlands Statistics)

As you see the lockdown has hammered the figures although some confidence seems to be now returning.

The mood among consumers was less negative in April 2021 than a month earlier, reports the CBS. Consumer confidence was -14, against -18 in March 2021. For the first time after December 2018, consumers were positive about the future economy again.

There was something else to cheer the ECB today.

Existing owner-occupied homes were 11.3 percent more expensive in March than twelve months previously. That is the largest price increase after May 2001. The price increase moderated somewhat in 2019, but picked up again in 2020.

It seems they are following the Canadian model of soaring house prices. We get some more perspective from this.

Compared to the trough in June 2013, prices in March were 62 percent higher.

The index which was set at 100 in 2015 is now at 153.9. Those of you who have followed my reports on house prices in the Netherlands will know that they were considered increasingly unaffordable. Well they have just got a lot more expensive as people have got poorer.

Next up was France as we got told this.

In April 2021, the business climate in retail trade and in trade and repair of vehicles as a whole has deteriorated markedly, in connection with the third lockdown. At 90, the indicator that synthesizes it has lost 5 points and has approached its level of last February……According to the business managers surveyed in April 2021, the business climate in services has deteriorated At 91, the business climate indicator that synthetizes it has lost 3 point ( Insee)

Manufacturing is doing better but the overall business index is at 95 giving an impression of a French economy that is struggling again at the moment.

Then we got an update on Italy.

In February 2021 the seasonally adjusted turnover index increased by 0.2% compared to the previous
month (+0.9% the domestic market and -1.3% in non-domestic market)……..With respect to the same month of the previous year the calendar adjusted industrial turnover index increased by 0.9% (+2.3% in domestic market and -1.8% in non-domestic market).

Whether there was a subliminal influence in the order as we started with core Netherlands followed by nearly core France and then Italy I do not know. But France especially seems to be struggling again.


To my mind there are two types of issue for the ECB. The first is that it needs to sort out its policy and how it wishes to present it. There is an irony here as President Lagarde opened her tenure with a promise to sort this out and has ended up with a shambles. In essence it is not hard as the ECB’s role is essentially to finance this.

In 2020, the government deficit of both the euro area and the EU increased significantly compared with 2019, as
did the government debt, in the context of the measures undertaken in response to the COVID-19 pandemic. In the
euro area the government deficit to GDP ratio rose from 0.6% in 2019 to 7.2% in 2020………. In the euro area the government debt to GDP ratio increased from 83.9% at the end of 2019 to 98.0% at the
end of 2020, ( Eurostat)

Also if the Financial Times is any guide to help finance the plans of her predecessor.

Italy’s prime minister, Mario Draghi, will next week announce a €221bn recovery package for a radical restructuring of the country’s economy as it seeks to bounce back from its deepest recession since the second world war.

The next issue is the level of the Euro so that also counts against any tapering of QE. The Canadian Dollar had a strong day yesterday so that gave a signal of what might happen and the ECB is supposed to be pushing the Euro lower.

But if we step back there is a much deeper crisis here. Many countries were facing an issue of lack of economic growth pre pamdemic but the Euro area especially so. The present Covid wave and vaccine go slow means it us set to be one of the last to get back to normal. But what if we go back to slow/no growth? The ECB is trapped in a cycle of QE and negative interest-rates and perhaps via a digital Euro even lower interest-rates and thus presumably even higher house prices. As Elvis so famously put it.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

The ECB plans for ever more QE and lower interest-rates

Yesterday brought news that there is plenty of work ahead for the European Central Bank or ECB. It came from the European Commission and the emphasis is mine.

The Commission has today taken steps to ensure that borrowing under the temporary recovery instrument NextGenerationEU will be financed on the most advantageous terms for EU Member States and their citizens. The Commission will use a diversified funding strategy to raise up to around €800 billion in current prices until 2026.

Interesting that they claim to know what future bond markets will be doing, but I was already expecting that the ECB will be brought in to buy at least some of the bonds. The borrowing will be large in annual terms and any repayment is kicked safely into the very long grass. The choice of 2058 looks to be driven by the fact that the ECB only buys bonds up to the 30 year maturity.

This will translate into borrowing volumes of on average roughly €150 billion per year, which will make the EU one of the largest issuers in euro. All borrowing will be repaid by 2058.

Then we got confirmation of the role of the ECB in this.

EU will create liquidity buffer at the ECB as part of recovery fund to ensure funding needs are always met – EU official  ( @PriapusIQ )

Ah so “liquidity buffer” is what it is called now! Regular readers will be aware that this fulfills two of the themes we have. Firstly the ECB is increasingly the buyer of first resort for Euro area debt with the kicker that “liquidity buffer” sounds like a euphemism for edging closer to buying in the primary markets. Next that the PEPP capacity ( 1.85 trillion Euros)  will be used, in spite of the regular claims that it may not be. After all at 960 billion it is already much larger than the original plan.

The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December, for a new total of €1,850 billion.

I suspect it will turn out to fulfill the definition of temporary in my financial lexicon for these times as well.

The PEPP is a temporary asset purchase programme of private and public sector securities.

There was also this in the announcement.

This will also attract investors to Europe and strengthen the international role of the euro.

This is curious as they already have plenty of opportunities to buy Euro area debt should they wish. Also the Euro is widely traded. Perhaps they mean that international investors will be attracted by the ability to front-run the ECB and make an easy turn. Language can be loose here because as I was looking at the debt issuing vehicle the European Stability Mechanism or ESM I spotted this in today’s blog from it.

As a result, the Greek economy was structurally more resilient at the start of the pandemic than it was prior to the sovereign debt crisis.

Really? The economic collapse was on top of a contraction of 20% or so previously. Also the debt to GDP ratio is now north of 200%. Plus the blog seemed to be trying to have its cake and eat it by lauding austerity.

 Past consolidation efforts, though quite painful, enabled the country to enter the pandemic with a very healthy budgetary position.

But also fiscal stimulus.

This allowed the government to combat the effects of the current crisis with countermeasures amounting to approximately 9.4% and 6.5% of GDP in 2020 and 2021, respectively.

This confusion over whether debt and deficits are bad was repeated by the man running this show which is Klaus Regling of the ESM.

And some like to compare the numbers in Europe to the US, but they are comparing apples and pears, I think, because the fiscal deficit, that’s true, is jumping up a lot more in the US, which, by the way, also means that the debt levels in the US are higher than in almost all European countries now.

So debt is apparently bad here rather than strengthening the international position of the Dollar or enhancing growth.


These days central bankers try to tell politicians what to do as this from ECB Vice President de Guindos yesterday shows.

 It is therefore of the utmost importance that the NextGenerationEU plan becomes operational without delay, as it would allow Member States to restart their economies, enhance their resilience and foster innovation.

As an aside the use of “resilience” is always a sign of trouble. For example we are regularly told the bodies below are resilient.

For example, the profitability outlook for banks remains weak as lower-for-longer interest rates dent margins and structural challenges persist.

Returning to the main point things are really rather awkward as an ex-politician now posing as an independent central banker tells current politicians what they should do.

The Digital Euro

This has been gaining news recently and this started with Isabel Schnabel a week ago. She opened this section by getting her retaliation in first.

In our view it is wrong to describe bitcoin as a currency, because it does not fulfil the basic properties of money. It is a speculative asset without any recognisable fundamental value and is subject to massive price swings.

That left her open to this response.

Currencies such as the euro don’t have any intrinsic value either, but are simply based on trust.

The euro is backed by the ECB, which is highly trusted. And it is legal tender. Nobody can refuse to accept euro. Bitcoin is a different matter.

I am sure the ECB is highly trusted in her circles as it provides well paid employment but beyond that? Well it gets worse because whilst Facebook has had issues the rise of Bitcoin clearly shows people are willing to take quite a risk to avoid central banks.

They are surely more likely to trust the ECB than Facebook or other private operators.

Board member Panetta was on the case yesterday and I note he seemed to get in a tangle on the privacy issue.

Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data.

Okay so it will be pretty much completely private. But only a few sentences later we get this.

Digital euro payments could guarantee different degrees of privacy[7], involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities.


Even though the headline measure seems a bit stuck with the Deposit Rate at -0.6% and of course money available to banks at -1%, there is quite a bit going on at the ECB. It’s role of supporting fiscal policy means that its QE bond buying looks ever more like a treadmill it cannot turn off. Or a President Lagarde put it in an interview with CNBC last week.

We may well reduce the pandemic emergency programme when the time comes, when we see the crisis coming to an end. Yes, but that’s the emergency programme. We also have another programme of asset purchases. And as I said, net asset purchases will continue until we start looking at raising policy rates.

So the EU Recovery Fund seems set to provide even more bonds for it to buy although of course it has yet to be ratified and is progressing at a sedate and indeed stately place.

It’s backstop looks ever more like being the digital Euro which as I explained back on the 11th of February.

ECB‘S Panetta: Minus 1%-2% Remuneration On Digital Euro Could Not Be Enough To Prevent Capital Flows Out Of Banks In Crisis

Perhaps the -3% suggested by the IMF?




Euro area money supply growth has fed government spending and house prices

A feature of these times is that thing’s are often not what they seem. After all the Bank for International Settlements is holding a conference on innovation today but the speakers are bureaucrats like Christine Lagarde of the ECB and Mark Carney formerly of the Bank of England. Still we can stay in the international scene because before we even get to Euro area money supply let us take a moment to note that it is not the only source of what Abba sang about.

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

If they are right then it is about to be very sunny at the offices of the International Monetary Fund.

Great news: IMF Executive Directors conveyed broad support for considering an SDR allocation of ~$650 billion! Key step to ensure all members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support recovery. ( IMF Head Kristalina Georgieva )

That would be quite an increase on the present level of US $293 billion. One can easily see how this would be attractive to politicians as it is money created out of nothing they can then spend. Thus I can see how Kristalina is excited and even more so as I note it inflates her status. However I note the reception on Twitter was much less warm especially from Argentinians noting the IMF role in their problems. Of course that returns us to Christine Lagarde again as I recall her assuring us that the IMF programme in Argentina was going well.

Switching back to the Euro I note that it is 31% of the SDR so in equivalent terms its share of the increase would be around 170 billion Euros.


Just over a year ago this new variant of QE was announced by the European Central Bank. This was because it was in danger of breaking issuer limits in places like Germany and the Netherlands. Let me explain this via the ECB Blog just written on the subject and may I remind you that each announcement was accompanied by an “up to”

We launched the PEPP on 18 March 2020, with an initial envelope of €750 billion, as a targeted, temporary and proportionate measure in response to a public health emergency that was unprecedented in recent history.

That seemed a lot of the time but well that did not last long…..

In June 2020 we expanded the PEPP envelope by €600 billion, to a total of €1,350 billion, and announced that we expected purchases to run for at least another year.

Actually that did not either.

To underpin our commitment, in December 2020 the Governing Council decided to expand the PEPP envelope by an additional €500 billion, to a new total of €1,850 billion – more than 15% of pre-pandemic euro area GDP.

This is a lesson in how up to 750 billion has ended up at just over 900 billion so far and looks on course to double that. I say that with the confidence of someone noting that no central bank has ever done less and indeed none have ever reversed course. The US Federal Reserve did have a slight trim but then added far more. From the point of view of the money supply we see that over 900 billion Euros have been added over the past year and that this is in addition to the existing QE programme or PSPP.

Also let me call out its second sentence.

It stabilised financial markets by preventing the market turbulence in the spring of last year from morphing into a full-blown financial meltdown with devastating consequences for the people of Europe.

The reality is that it was the FX Swaps programme of the US Federal Reserve which did that. The PEPP allowed governments and with other efforts large corporates to borrow even more cheaply and in fact frequently be paid to do so.

As to my “More!More! More! ” point it is kind of Christine Lagared to reinforce it albeit unwittingly.

Based on this joint assessment, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.

Money Supply

Such measures leave us on this road.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

The slight hint of slowing may well simply be that February is a relatively short month. These are record levels and a further point is that with M1 at just under 10.5 trillion it is on a grand scale. Also let me slay a dragon which frequently appears. Last month there was an extra 10 billion of cash money making the growth rate 12.5% and the total 1.39 trillion Euros. So it is far from dead.

The narrow money push feeds straight into broad money.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 11.3 percentage points (as in the previous month), short-term deposits other than overnight deposits (M2-M1) contributed 0.3 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed 0.7 percentage point (down from 0.9 percentage point).

The net effect was a slight slowing from 12.5% to 12.3% and whilst it in itself means little change there is something significant in the breakdown. The theory is that narroe money growth is supposed to stimulate a response from bank lending but as you can see M3-M2 is not much and in fact has slowed. This is significant as it breaks one of the monetary transmission chains or rather if you prefer the “high powered money” of the textbooks has been replaced by a limp lettuce. Unlike Fleetwood Mac they have broken the chain.

And if you don’t love me now
You will never love me again
I can still hear you saying
You would never break the chain (Never break the chain)


Let me know spin this around and look at it from a different perspective which is both good and bad. From an article by Patricia Kowsman in the Wall Street Journal.

LISBON—Paula Cristina Santos has a dream mortgage: The bank pays her.

Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.

The good bit is an ordinary person benefiting as it is usually government’s and big business. I hope there are plenty of others.

The catch is that in theory broad money should be expanding due to much more lending as we see a narrow money push and negative interest-rates. But whilst credit in the Euro area is now over 20 trillion Euros ( 20.4) I see that of the February increase 66 billion is for governments and only 36 billion is for the private-sector. Or if you prefer annual growth rates of 22.9% and 5.1%.

So if we take the 5.1% number that may be why inflation is disappointing the hyper- inflationistas. Although there is one area where we see rampant inflation if we stay with the example of Portugal.

In 2020, the House Price Index (HPI) increased 8.4% when compared with the previous year. This rate of change was 1.2 percentage points (pp) lower than in 2019. From 2019 to 2020, the prices of existing dwellings (8.7%) increased at a higher rate than new dwellings (7.4%).
In the 4th quarter of 2020, the HPI year-on-year rate of change was 8.6%, 1.5 pp more when compared to the previous quarter. ( INE)

The ECB faces questions over QE bond purchases and Greensill

As the ECB gathered together on Zoom yesterday there will have been plenty to discuss.We can start with its main priority these days which is to act as an enabler for fiscal.policy.

Frankfurt, we got a problem. A second consecutive week of very low net PEPP purchases (€11.9bn) despite dovish ECB rhetoric. And don’t get us started with large redemptions and seasonal factors. Where there’s a will there’s a way. ( @fwred )

That followed this from Fred.

ECB weekly PEPP data shouldn’t attract too much attention in theory. Except today they will, following a shockingly low €12bn amount of net purchases settled the week before, despite a very interventionist ECB rhetoric.

This is significant because it has been yet another Forward Guidance fail. We have noted ECB policymakers hinting that purchases will rise in response to the recent worldwide rise in bond yields. The reality is that they have cut them. There has been some noise about redemptions and it looks as though an old friend was back in the game. Those of you who recall the SMP which bought bonds in the Euro area crisis may have a wry smile at a large Italian bond maturing this week. But any excuses around that collide with the fact that the maturity date was known from the moment they looked at buying that bond. So shouting Surprise! Surprise! is laughable.

So we have another Forward Guidance fail and there is an additional irony as this is the meeting anniversary of when ECB President Lagarde told us that it was not its job to “close bond spreads”. That torpedoed the Italian bond market until she rushed round the news studios with a correction, That of course begged the question of who told her to do that and thus who is actually in charge?

Perhaps they have been unsettled by this from Welt in Germany.

The monetary watchdogs of the ECB are under criticism. Before their session on Thursday, a lawsuit against the emergency aid program PEPP was filed with the Federal Constitutional Court. The accusation: state financing. The plaintiffs see a failure of the federal government.

On every occasion so far that court has morphed into a version of a chocolate teapot but maybe none the less things have been unsettled.

Negative Interest-Rates

There has been much less news on this front. The ECB seems somewhat paralysed at -0.5% for now.Looking further ahead then as we noted on February 11th they plan to use a Digital Euro to take interest-rates even lower, but not right now.

Actually Welt has a view on this too.

Good Morning on ECB day from #Germany, where key rate should be at ~3% & so 3ppts higher than current rate, acc to Taylor Rule w/German core inflation at 1.7% & unemployment rate near NAIRU.

Meanwhile back the real world the actual unemployment rate is much higher than the official one due to the furlough scheme.


Having regularly referred to this in an economic sense the ECB now faces an issue here.

In Germany, the number of new Coronavirus infections per day has not been this high since January 28th. According to the Robert Koch Institute, the third wave has begun.

Berlin, March 11th, 2021 (The Berlin Spectator) — The head of the Robert Koch Institute in Berlin, Professor Lothar Wieler believes the third Corona wave has hit Germany.

Other Euro area countries are reporting rises in cases too.

Sky News analysis has found cases are rising in three-quarters of European countries, with the highest increases happening in central and eastern Europe.

Only nine of the 40 European countries analysed recorded fewer cases in the first week of March than they did in mid-February, with Portugal, Spain and the UK registering the largest drops.

Spain seems to be doing well in terms of cases and yesterday France got above 200,000 vaccine does but the catch with France is that some days are still poor on that front.

The next bit from Sky echoed with me as I have come across 3 friends form the Baltic States this week.

Parts of Estonia ran out of hospital beds this week, the Czech Republic and Slovakia have had to move COVID hospital patients to other European countries and Latvian hospitals are preparing for a third coronavirus wave.

So let us wish the afflicted well and switch to the economic issue that if the ECB is to follow its own rhetoric and dare I say it Forward Guidance it has some thinking to do.

The Euro

This is a happier area for the ECB as it has returned pretty much to the level it said it had begun “watching” it back last autumn. So after a period of embarrassment when the Euro continued to rise anyway it has returned to the 1.19s versus the US Dollar.

However that does represent a rise of nearly 6% over the past year as we note that the Euro does appear to be something of a safe haven currency these days. Also it does return us to the rate of bond purchases issue because with exchange rates moving in its favour it could have given things a further push.


You may have noted the unfolding Greensill Capital scandal over the past few days.From Reuters.

The scandal affects almost every division of the Zurich-based bank. Credit Suisse Asset Management oversaw $10 billion of funds that invested in Greensill’s trade-finance assets. Founder Lex Greensill was a private bank client. Meanwhile Gottstein’s investment bankers advised the SoftBank Group-backed company on a planned capital raise, and the bank lent it $140 million.

At this point the ECB may be slapping itself on the back for being clear of this but there is an oh wait moment.

Some cracks showing already: German deposit guarantee scheme estimates Greensill will cost them 3bn & German savings banking federation blames Raisin for brokering those deposits & says Raisin is freeriding the DGS & asks Sparkassen to end their biz w/ Raisin. Very important. ( Johannes Borgen)

The daily German newsletter tells us this.

DSGV President Schleweis asked  savings banks that cooperate with deposit brokers such as  Raisin  or  Deposit Solutions  yesterday to rethink their cooperation against the background of the Greensill Bank malaise … +++ … Schleweis literally referred to the interest portals as “free riders”, whom one should “not trust blindly” and who have a “very difficult business model”

These things have a habit of turning up in unexpected places don’t they? I guess Germany was chosen as they expect that the scheme would be able to pay. But that is the opposite of reassuring for Germans and indeed the German banks who partly fund the scheme.


Actually the Greensill issue has a further point of note. From Reuters.

Germany’s deposit protection scheme protects individuals but not institutional investors. Greensill Bank has about 500 million euros in unsecured funds, such as those from Osnabrueck and other towns, a person familiar with the matter said.

Local councils and the like showing feet of clay in financial matters has of course happened in plenty of places including the UK. But the ECB may get dragged in via this.

Like the German towns of Monheim am Rhein and Bad Duerrheim that have announced similar concerns about Greensill Bank, Osnabrueck was attracted to the lender because it helped them avoid paying negative interest rates on deposits elsewhere.

Oh and remember the AAA days? There is an echo of that and the emphasis is mine.


Osnabrueck, which has a population of 170,000, opted for Greensill Bank because its very good credit rating meant the city could assume it was a very safe investment, local official Fillep said.

So as you can see under the surface there is quite a lot going on. I guess the ECB will be grateful it did not ship in a load of Greensill bonds.

The Bank of England is getting its inflation excuses in early

Yesterday brought a set piece speech from the Governor of the Bank of England via a virtual broadcast to the Resolution Foundation. There was much to consider including a statement of where he thinks we are in economic terms.

The economic impact of Covid has in aggregate been very large. We expect that by the end of the first
quarter, UK GDP will still be around 12% below its level at the end of 2019, a huge shortfall.

As it is rarely put like this let me point again that this is a decline of depressionary size and in fact of a Great Depression. Hopefully it will be short but as we stand we do not know that.

Inflation Risks

Rather curiously for a man with his foot pressed down hard on the monetary pedal we did get a section on inflation dangers.

Firms in the DMP estimated that Covid has increased average unit costs by around 7% in the second and third quarters of last year. They expected this impact to reduce to 5% by the second quarter of this year, with a more
persistent negative impact of 2%. All of this reflects new costs – for PPE, screens etc., and the impact on
costs from social distancing reducing capacity. ( DMP = Decision Maker Panel)

Do not fear though as the productivity fairy is deployed to avoid any inflationary consequences. This is rather curious because in the next section we get told we have not had much of it for years and maybe decades.

A Lost Decade?

I give the Governor credit for at least addressing this issue.

First, the UK has experienced a fall in the average rate of growth, reflecting slower growth in potential supply capacity. Chart 3 illustrates the four-quarter GDP growth rate since 2000. It is apparent that the average growth rate
has fallen from around 2.5% in the years before the global financial crisis, to around 1.5% in the period
immediately prior to the Covid pandemic.

There is a consequence of this and as you can see the productivity fairy which turned up so conveniently in the section above had been missing for many years.

Chart 4 shows the same timeline for aggregate labour productivity per hour over the last twenty years. Again, the story is not encouraging. Another way of representing this, is to note that the level of activity in the UK following the global financial crisis is significantly below its level at
the equivalent stage following the 1930s Depression.

Regular readers will be familiar with these issues and one follows pretty directly from the other although some care is needed as the labour market is involved. The productivity hit has a good feature which is that pre Covid the UK employment situation was strong. But also a poor one which has been the fact that real wages have not achieved pre pandemic levels. Just for clarity I have reported the recent average earnings figures to the Office for Statistics Regulation for those wondering about the figures which claim we are in the middle of a wages boom right now.

Oh and there is no mention at all of the fact that the fall in both economic growth and productivity comes in a period where monetary policy has been fully deployed by the Bank of England.

What next for policy?

It is quite revealing that we start with something more relevant for fiscal than monetary policy these days.

First, we will continue to execute the announced programme of asset purchases, which we expect to be completed by around the end of 2021.

If we look at the difference between the amount completed ( ~£760 billion) and the present target ( £875 billion) then if we changed today the pace would be about two-thirds of what it is now. That may be awkward if bond yields continue upwards but this gets ignored.

Next we move onto what I can only call an oxymoron squared. This is because “Forward Guidance” almost immediately became one of the clearest oxymorons of our time so cannot be an important piece.

Second, we have in place an important piece of forward guidance

As you can see they will loosen policy with the speed of Usain Bolt and will tighten it by contrast in the form of definitely maybe.

“If the outlook for inflation weakens the Committee stands ready to take whatever additional action is
necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there
is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2%
inflation target sustainably”.

Or maybe not as you see “spare capacity” is out old friend the “output gap” in another guise. As you can make it up to be almost any number you want ( remember how the 7% unemployment rate morphed into a 4.5% estimate) it means they have no intention of tightening policy in spite of this bit.

with a rapid recovery later this year

The grounds are being tilled for possible inflation trouble as we see another deflector shield being polished.

And in this context it is encouraging that measures of inflation expectations have remained relatively stable in the UK, despite the seismic shocks and unprecedented policy response we’ve experienced over the past year.

This is the new central banking standard where they use inflation expectations as a reason to do nothing. Actually inflation expectations have been rising but I do not expect them to let that bother them.

Negative Interest-Rates

This area has been one where the Bank of England has scored several own goals. For example at one extreme we have had Silvana Tenreyro constructing quite a fantasy world about the impact of negative interest-rates in the Euro area. Also there have been several occasions when people have thought and in some cases feared they were due imminently. It is yet another reason to describe Forward Guidance as an oxymoron.

Here is the new description and yes “toolbox” is another new phase from the central banking zoom calls.

We have been quite clear these toolkit decisions should not be interpreted as a signal about the future path of monetary policy. We decided to ask the banks to make preparations within the next six months, in case we need to use negative interest rates to provide further support.

If you think about it seeing as we first had negative interest-rates over a decade ago ( some mortgage rates went negative as Bank Rate was cut to 0.5%) this is quite a confession of incompetence.


Governor Bailey must have been pleased to leave the Financial Conduct Authority. I am sure he was too important to be a user of the toilets where the dirty protests took place. But there was the report on the London and Capital Finance scandal which pointed the blame in his direction. In some ways even worse was his campaign to reduce overdraft interest-rates which managed to double them!

As Governor in some ways he has had it easy as all he had to do was copy moves made elsewhere by lowering interest-rates and doing lots of QE. Now it gets harder as the recovery hopes would suggest a winding down of the support except they have pre commited in several areas. Also they have completely ignored the fact that monetary policy takes 18/24 months to work. It means that they have abandoned past knowledge and gambled.

Also there is a familiar assymetry. The Bank of England is not slow in coming forward when it feels it can claim some success however dubious But the period of slower economic growth does coincide with its own interventions. For someone like me worried about the effect of Zombie companies being given ever more blood transfusions there is another issue. Can new companies not get past the Zombies meaning they have driven this?

although business investment did recover from a low base following the global financial crisis, it too was weak in the period prior to the Covid pandemic.