Calculated Risk — Krugman: "Insane in Spain"

CR: The ECB's LTRO has bought a little bit of time, but if the policymakers stay focused on austerity, they will fail. A key European analyst pointed out last week that essentially all recent sovereign issuance in the periphery has been purchased by in-country banks, and that was related to the LTRO from the ECB. In other words, there is no private market for peripheral sovereign debt. The key analyst concluded: "The EMU (Economic and Monetary Union) is over".

Read it at Calculated Risk

Krugman: "Insane in Spain"
by Bill McBride

As I said from the outset, Germany will scuttle it. The Bundesbank is unwilling to agree what it takes.

How's that gold lookin' now?

Last week just before the ECB conducted its LTRO 2, every pundit around was touting gold as protection against "rampant money printing."

We MMTers knew better. Central bank monetary operations are not inflationary. They're not the same as fiscal operations. They don't create NFA.

So, where's gold now?

It's down over $100 since that LTRO 2. And that's with Iran concerns and everything else.

Hey gold bugs...what happened???

For the past week you had all these gold bugs and other "very smart people" telling us how the world is being "flooded with money" by the central banks and that the ECB's coming LTRO (II) would be another example that. Then the ECB does a larger than expected, 529 bln euro ($700 bln) and what happens? Gold tanks. Great call, gold bugs. Great call.

MMT had it right, once again! Central bank monetary operations are NOT inflationary.

The Fed cannot print money, even if it wanted to. Only the Federal Government can and it's currently "un-printing" money, as are nearly ALL governments of the industrialized nations of the world.

Good call, gold bugs...good call!

Second LTRO reveals market bias toward dollar bearishness

Back in December when the ECB first announced the 489 bln euro LTRO the euro currency rallied.

Now the ECB is out a second LTRO in the amount of 470 bln euro and the euro is once again rallying.

I have to admit, it's odd to see the euro's strength in the face of all this "money printing." The ECB lends $600 bln in ONE DAY and the euro goes up. When the Fed even hints at doing QE or any other form of monetary policy that adds to its balance sheet, investors are all over the dollar, selling it wildly. The last round of quantitative easing played out over six or eight months and the dollar got crushed. The ECB does it in one day and it's bullish for the euro. Go figure?

To me, this behavior exposes what I believe to be an inherent and irrational, negative bias toward the dollar. People want to sell it for any reason. Their arguments against the dollar (e.g. QE is "money printing") are not only wrong, but applied solely to the dollar and no other currency. If some other central bank or fiscal authority does the exact same thing, these very same investors are are either ambivalent or rationalize it in a way that allows them to take the opposite view.

"The ECB is printing 500 bln euro? Oh, that's bullish."

Sorry, but you can't have it both ways. Something's gotta give. Investors are clearly acting irrationally when they sell one currency for one reason and buy another for exactly the same reason. This type of behavior MUST NECESSARILY lead to a massive loss of money for those operating in this regard, at least eventually.

The problem (for me) is that, as Keynes said, investors can stay irrational longer than I can remain solvent. :(

ECB's "liquidity injections" just reinforcing deflationary forces already in place

The ECB's balance sheet (total assets) is now up to $3.5 trillion. That's 25% larger than the Fed's. (All this "money printing" eh? So where's the inflation? Why is gold falling?)

When the ECB expands its balance sheet, it buys bonds from the public and replaces those bonds with reserves (denominated in euros). Those reserves pay 25 basis points, however, the bonds paid far more. (Case in point: Italian bonds pay near 7%.)

So you can see how this “liquidity” operation is stripping a HUGE amount of interest income from the private sector in Europe. HUGE! If you sold an Italian bond to the ECB you just lost 675 basis points of income!

So rather than being inflationary or “stimulative,” the whole thing is massively deflationary because of the interest income reduction that is going on. This will exacerbate already weak economic trends in the Eurozone in 2012!

The Draghi gambit

Simple explanation of the ECB's Long-Term Refinancing Operation (LTRO) that begins December 21.

Read it at CounterPunch
Draghi’s Stealth Plan
by Mike Whitney

LTRO is commonly represented as similar to QE in the US, but it seems more comparable to the Fed providing banks with lost cost loans assumed assumes to be used for purchasing state bonds and munis.

If the plan does succeed and sovereign bond yields fall while the banking system is slowly nursed back to health, then Draghi’s stock will rise considerably. In fact, he’ll be the most powerful man in Europe because he’ll be able to dictate economic policy by merely adjusting the amount of sovereign debt he accepts as collateral from the banks. This is unspoken goal of the emergency liquidity assistance facility, to put big finance in the catbird seat so they can impose hairshirt austerity measures on debt-stricken nations through the coercive manipulation of bond yields. It’s a foolproof way of trouncing representative government and handing the levers of power to unelected bankers. But then, there’s nothing really new about that, is there?

Remind me where is Draghi from. Oh, right, Goldman Sachs.