By Don Quijones,
Negative interest rates, helicopter money trigger Clash of Titans.
By Don Quijones, Spain & Mexico, editor at Wolf Street.
Relations between the government of Europe’s biggest economy, Germany, and Europe’s most powerful financial institution, the European Central Bank, have soured to the point of curdling.
The latest volley of barbed remarks came from Germany’s dour Finance Minister Wolfgang Schäuble, who has never been one to mince his words. Speaking at an awards ceremony outside Frankfurt on April 8, he told the audience that the stellar rise of right-wing populist Alternative für Deutschland party was due in large part to the ECB’s loose monetary policy.
“I told Mario Draghi … you can be very proud,” according to a report by a Dow Jones journalist who was present.
Schäuble’s off-the-cuff remarks set in motion a flurry of caustic statements from other conservative German politicians, with the lion’s share of the ire reserved for the ECB’s negative interest rate policy.
“Mario Draghi’s policies have led to a massive loss of credibility of the ECB,” said the deputy head of the CDU parliamentary group, Hans-Peter Friedrich, who also called for Draghi to be replaced by a German when the Italian completes his term, in 2019. “The next ECB Chief must be a German, who feels bound to the German Bundesbank’s tradition of monetary stability.”
Friedrich’s sentiments were echoed by the CSU foreign policy expert and a member of the Bundestag Hans-Peter Uhl. “We cannot afford another Draghi,” he said. “We need to place a key German financial specialist at the head of the ECB.”
As the German daily Handelsblatt notes, the latest exchange marks a new low for Germany’s policymakers in their relations with the Frankfurt-based ECB. The main trigger for the latest storm of protest was Draghi’s praise last month for the idea of “helicopter money” – showering citizens with newly created money.
For a country that has traditionally prided itself on its fiscal rectitude and which less than a century ago lived through one of the worst recorded episodes of hyperinflation, the prospect of handing out free money, created out of nothing, to Eurozone citizens was just too much to bear.
Although the ECB has since backtracked on the idea of helicopter money — publicly at least — its unbridled enthusiasm for negative interest rates has probably already done enough damage, threatening to upend banking’s centuries-old model of safeguarding deposits and charging interest on loans.
Many German banks are already feeling the pinch. Germany’s biggest bank, Deutsche, has made headlines for a string of huge losses as well as massive exposure to risky derivatives. It also faces the prospect of costly lawsuits over its role in the manipulation of the London “fix” price for gold and silver. As if that were not enough, it has to find a way of turning a profit with below-zero interest rates, as do all other German — and for that matter, Eurozone — banks.
My opinion: “Helicopter Money” is the term used for the central banks giving money directly to consumers, instead of putting it into the banking system, which has not worked. Switzerland is already on the way to doing this once it is approved. Each Swiss (or household) would get €1700 from the central bank. The central bankers have lost their minds. They are now desperate.
Note that Deutsche Bank is being sued for manipulating the gold and silver markets. Large US banks have settled similar lawsuits. As I have written many times, all the major markets are now manipulated, and the regulators just let it go on.
NIRP, negative interest rate policy, has brought exactly the opposite of the intended results. It is actually producing ‘deflation,’ not inflation. But in the tradition of all governments throughout the ages, when something doesn’t work, they do more of it. We predict they will, including the US.
The Fed has the great urge to hike rates, at the same time it lowers its forecast of GDP growth. They want to have rates higher when the recession hits so that they can lower rates. Insanity! That’s like getting chemotherapy before you ever have cancer. It will probably cause cancer you are trying to prevent.