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The European central bank is trapped

• lioeters 4y ago
  > The credit-based global financial system..is like a game of musical chairs that we have to keep adding people and chairs to in order for it to never stop.
  • ellopoppit 4y ago
    Isn't that a simple metaphor for a ponzi scheme
• peter_d_sherman 4y ago
  >"In other words, liabilities are collateralized by other liabilities, all the way down."
• lottin 4y ago
  Terrible article as usual from this author. She has no formal training in economics and as a result gets everything wrong. Why does she keep writing articles about economics if she doesn't know anything about this subject? I don't understand.
• kurupt213 4y ago
  This is crazy…only the central government should be able to run a deficit
• Proven 4y ago
• naveen99 4y ago
  Have they considered balancing their budgets ? Somehow california and many other us states have a surplus.
  • anm89 4y ago
    You should really go over there and explain this to them. You could save all of them.
    • ceeplusplus 4y ago
      The problem for EU countries is that for too long they've neglected military spending in favor of social programs, but now the chickens are coming home to roost. US superpower status is waning, meaning EU states will need to ramp up military spending, and Russia is more aggressive than it's ever been. In the face of this EU countries will have to somehow cut social spending or raise taxes even higher. Neither is politically tenable.
      • toomuchtodo 4y ago
        There is a third option. Increase military spending in the short term, but also be intentional about supporting immigration of younger, skilled workers from China and Russia (both whose fertility rates are below replacement rate and continuing to fall rapidly). Short term, military spending contains these countries with the threat of physical force, long term, you’re “stealing” (for lack of a better term) their productive future workers for someplace with (arguably) more stable, better governments and living situations (it’s not a secret those with means have been fleeing these regimes). This further handicaps the countries I mentioned on a go forward basis, allowing for (potentially) a decline in military spending over time.
        • Sakos 4y ago
          Huh? We've been essentially doing this for the past 30 years. Chinese often go back to China with their US/European education and put it to good use there. It doesn't work as a brain drain when China has such a strong domestic market and there's so much money to be made there. There are also cultural and ideological ties that don't seem to be easily broken.
      • ClumsyPilot 4y ago
        EU countries have much better militaries that Russia does if thet can act in unison. In fact recent events show just how linited Russian powess are. Also we are not doing enough to support ukraine, after 100 days of hand wrangling we decided to supply missile systems
• anm89 4y ago
  > However, the European Central Bank arguably has the hardest job of all. This was very apparent in the head of the ECB Christine Lagarde’s recent interview. She was asked, “how will you get the balance sheet down?” while being shown the ECB balance sheet on a screen. She answered, “It will come. It will come. In due course, it will come.” The interviewer paused, confused, and then asked, “…how?” And she answered, “In due course, it will come.” And then smiled. She offered no answer, no description, no clarification, and had rather awkward expressions throughout the exchange. This is because, like most central banks, there is no plan. It won’t come. Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse.
  • Aperocky 4y ago
    Sounds like an easy job, just print money and punt the problem down the line.
  • quercusa 4y ago
    Chance the Gardner: As long as the roots are not severed, all is well. And all will be well in the garden. President “Bobby”: In the garden. Chance the Gardner: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
• enlyth 4y ago
  Is there a date on this article? I really dislike when authors hide when something was written
  • erichocean 4y ago
    It appears to be from today.
    • enlyth 4y ago
      That's such an important thing to know when talking about the markets, that's why I couldn't believe there's no date on the article.
  • DennisP 4y ago
    It talks about an interview on May 25, so we at least know it's after that.
• deltree7 4y ago
  Dumb article that gets so many basic things about Money Supply and Debt wrong
  • lbotos 4y ago
    Care to elaborate?
    • deltree7 4y ago
      1) Spurious correlation between Cumulative Debt and currency circulation. 2) Confusing yearly numbers like GDP to long-term Debt. Debt/GDP are just a ratio, we don't know what the upper limit it or does it even matter. 3) An inflationary era also means higher tax receipts. https://rollcall.com/2022/05/09/tax-revenue-boom-fuels-steep-budget-deficit-decline/ https://rollcall.com/2022/05/09/tax-revenue-boom-fuels-steep... which can easily cover any extra interest you may have to pay
  • yieldcrv 4y ago
    Agreed, I would also agree it is trapped but not for these reasons. They all want to control inflation, and are all considering or trying the same methods of doing so. The EU and Eurozone's lack of "fiscal union" is unique, but not really that relevant. The Central Bank there is going to crater the credit market, just like the Central Bank in the US is going to do. They are the biggest financial whales and they 1) stopped buying 2) now have trillions to sell, and are going to sell at a massive scale that's unheard of, to whom? good question, can the market absorb this much? At what price if the market literally isn't big enough for this amount of selling pressure? and its still too small of a scale for what they are actually trying to do 3) are going to let some bonds mature, and not let the paid back money get into circulation again, so there is just less of it for everyone else (note: sometimes they say they are only going to do 3) and not 2), very confusing) It doesn't matter that the EU one has a bunch of member-state debt, while the US Central Bank largely ignores municipal bonds and while having a bunch of national govt bonds (treasuries) on its balance sheet. They both hold corporate bonds now, and mortgage backed securities. Neither own stocks (although the US one bought some bond ETFs, which are stocks of funds that only own some bonds). They both stopped buying, are letting things mature, and also directly selling. Its going to be bad for everyone partially because its only an attempt to control inflation. Case in point being that energy costs will remain high either way. They're aiming to destroy optimism and re-range asset prices, where the yield of those assets are a higher ratio to their price. (aka stock prices more closely matching their profit or revenue growth or dividend payouts, bonds yielding higher)
• EGreg 4y ago
  In other words, claims for dollars (debt) grows far more quickly than the economy’s ability to generate dollars, and is far larger than the amount of dollars in existence. When this becomes too much of a problem, the amount of base money is simply increased by the central bank. Um, yes? That’s how the fractional reserve system works to solve the problem. And then the problem is solved. Debts are simply leverage on top of the base money supply. Banks are the source and sink of this credit money. When banks don’t think a business or person can repay a loan, they don’t extend credit. Also, when people or businesses default, the bank makes less loans to avoid becoming overleveraged. Gradual inflation isn’t nearly as much of an issue as a recession or a depression. It only hurts lenders who have locked in an interest rate, or “savers” who simply put money in a bank (which is the racket… helping the banking system create the money supply). The REAL issue is that bank underwriters have to GUESS whether a business will do well over 10-15 years. The banks are the source and sink of the vast majority of our money (the M2 credit money that the author talks about, vastly exceeding the M1 fiat currency). Now, if each community had its own currency and paid a UBI in it (monetary policy) and charged tolls and taxes in it (fiscal policy) then the community itself would be the source and sink of the money. Instead of bank underwriters guesising, PEOPLE would simply exercise their own choices as to which business to buy goods from. This is a far better way to pick winners and losers AND helps those who need the money the most. Banks don’t lend you when you NEED the money, only do it on predatory terms that get you further into debt. The real problem is not having an alternative to the banking system. Crypto COULD power such an alternative but this is what would need to happen: https://intercoin.org/proposal.pdf https://intercoin.org/proposal.pdf
  • sumy23 4y ago
    Gradual inflation isn’t bad, but heavy inflation is. People’s savings get wiped out. High inflation can undo a lifetimes worth of work in a few short months / years.
  • vba616 4y ago
    I have a hard time following what you've written, but none of it seems to have to do with liquidity - short term investments - so why bring up reserves?
• chiefalchemist 4y ago
  It's a global economy. If one shoe drops, we all drop.
  • vba616 4y ago
    I don't know, all the hand-wringing articles I see seem to ignore what seems interesting and notable to me. That is, the dollar has been strengthening for an extended amount of time versus other industrialized nations' currencies, and it continues to. Just look up some multi-year currency charts. So it seems to me that tells us that at least the Fed is being more aggressive at countering inflation than almost any other central bank. It seems to me to put US government policy beyond most reasonable criticism, even if imperfect, it must be better than everyone else's. But the pundits seem split between moaning about how especially terrible the Fed is and about how terrible all central banks are. I don't think people realize how good the US has it, and what we have to lose.
    • kayamon 4y ago
    • athrowaway3z 4y ago
      The greatest nation on earth: No security threats, large, extremely profitable, critical resources locally source-able, least-worst demographics, treasuries used as bank collateral around the globe. When people start complaining about criticism, especially "compared to others", is when I start to worry. Its apples and oranges. Yes, the US has it good. But there are so many things shockingly bad and there is no momentum to improve things. When the rioting starts I sincerely hope people who don't like criticism start fixing things instead of electing a non-idiot fascist to tell them they are better than the rest.
      • vba616 4y ago
        Ahhhh...people shouldn't complain about criticism that compares the US to others, but it's "apples and oranges". That phrase, apples and oranges, is a rebuke to an attempt to compare things. You sound like you're on the fence about this. But we know, it's not necessary to make sense, only to feel bad about the US. Just in case this thing, this time, will be its ultimate downfall. How bad would it be, not to feel bad enough about the US, in its last days? Think of what we would lose! ...
• IfOnlyYouKnew 4y ago
  It conveniently omits the debt held by the US on the federal level, which is 133 % of GDP, or more than any of the countries listed except Italy at 151 %. And there is no debt on the EU level.
  • mirntyfirty 4y ago
    If I read it correctly this is mentioned with the caveat that the federal reserve can adjust monetary policy to address that whereas the individual European countries mentioned are unable to.
• chewz 4y ago
  ECB is trapped? How about Bank of Japan?
  • bryanlarsen 4y ago
    Most Japanese government debt is held by the Japanese treasury. They could wipe it out with the stroke of a pen.
    • chewz 4y ago
      > They could wipe it out with the stroke of a pen. In MMT fantasy land they surely can. But in the real world it ain't that easy... > "the currency and Japanese financial markets are in the process of losing any sort of fundamental-based valuation anchor." - Deutsche Bank's George Saravelos in yesterday's report.. Japan is on verge of systemic collapse. Just watch USDJPY and JGB recently...
      • orwin 4y ago
        As i said before, i disagree with at least half of MMT, but people saying "MMT fantasy land" and then quoting Friedman-loving economists is quite ironic. Macro economists models aren't predictive, and as such, they are scientifically as useful as the book of Râ.
• tmaly 4y ago
  It would be interesting if they had some open simulations of the world economies. Something like a SIMS game for economics.
  • jonahbenton 4y ago
    These exist, kind of. Require a lot of background knowledge. https://www.federalreserve.gov/econres/us-models-about.htm https://www.federalreserve.gov/econres/us-models-about.htm
  • hndamien 4y ago
    https://codetod.itch.io/central-bank-sim https://codetod.itch.io/central-bank-sim Doesn't appear to simulate an economy very well, but its a nice idea.
• bryanlarsen 4y ago
  Why the heck would you ever expect to pay back that debt? The central bank is nothing like an individual where debt is bad. The central banker is more like the bank in monopoly -- the less money there is in the bank, the better off the players are. Money is created through fractional banking, quantitative easing and government spending. Paying back debt destroys money, the money that is used in the economy. The only reason to pay back debt is to prevent inflation from destroying the money through a different mechanism. But when inflation is under control, which it has been for 39 of the past 40 years, debt should not be paid back. Expecting to pay off government and central bank debt is like expecting all the money to be returned to the bank by the end of a game of monopoly.
  • baldr333 4y ago
    Holy shit that's your mind on MMT
  • chewz 4y ago
    Italy's debt is almost 160 pct. of GDP and Italy's GDP stagnated over last 20 years. And budget deficit is very substantial (and will grow in comming recession)... It means that Italy could afford to roll-over its debt only due to European Central Bank suppressing for years yields on Italian bonds. But now market yields go up as ECB is set to raise rates and withdraw QT. If Italy were to pay market rate on its debt it would bankrupt its budget. Most of Italy's revenues would go toward coupon payments of debt leaving very little for pensions, infrastructure, healthcare etc. So it is not about not repaying debt but about Italy's inability to roll it over in the markets. Single currency and single central bank in eurozone implies policy fragmentation - ECB has to address different issues at the same time. High inflation in the North and stalled growth with high yields in the South.
    • imtringued 4y ago
      If Italy were to pay market rate on its debt it would be negative as the implementation of negative intereset rates on cash reenables the market mechanism of allowing a debtor choose how much he wants to be in debt. The 60% debt to GDP mandate of the eurozone could become obligatory and would result in all EU countries refusing to take on more debt, forcing the interest rate into deep negative territory.
• eftychis 4y ago
  a) We need to stop using the word debt for central banks. Consumers in their daily lives learn that debt is bad. For central banks is the way they work. (And companies try to have always some form of debt for liquidity and reducing risk.) b) go on with our lives. The ECB has other issues that it should be criticized about -- mainly it is unsurprisingly a political tool and not having the economic growth, wealth, and stability of the EU members as its priority.
  • idlehand 4y ago
    A new word makes sense. In my native Swedish the word for debt is also the word for guilt. Tells you something about our view of debt and why the national debt is so low.
  • anm89 4y ago
    This view point is never endingly naive. The confidence which people who never seem to have a deep grasp on the topic repeat it never gets old. They are issuing fixed coupon, fixed term credit obligations. What do you want to call it? A bicycle? There happens to be a word for this particular scenario where someone lends you money and you create a contract to pay it back. It's called debt. The entire finance world isn't reworking itself around your misunderstanding of the issue.
    • IshKebab 4y ago
      You've missed his point. He isn't misunderstanding the term "debt", he's just saying there should be a different word for "good debt" that doesn't have the negative connotations that it does with personal debt. I guess kind of like how mortgages aren't seen as bad even though they're debt. Fairly safe debt, sure. But still debt. I don't know if a new word would help but you've misunderstood anyway.
• imtringued 4y ago
  As usual the answer is that profits cannot exist in aggregate, but somehow they do, distorting the market and forcing the government to borrow money to cover the reduction in the money that is still circulating. Since debts must be paid on time but savings do not have to be spent on time you have an inherent disconnect between how quickly you can borrow and get into trouble and how fast debt can be paid off. Well, the obvious answer to solve this problem is to force urgency upon savers to restore the balance. By introducing a negative interest rate on cash, borrowers can now refuse additional debt as savers cannot threaten the rest of the economy by pulling money out as cash and therefore it is no longer possible to extort a 0% interest rate out of people that don't want to be in debt in the first place. Since the artificial zero lower bound no longer exists, savers must now compensate borrowers for their tardiness instead of being allowed to exploit them. Have you never wondered why so many people refuse to spend off their savings, resulting in an endless growth in the money supply? Saving is deferred spending and at some point that spending must actually happen, yet in practice it has never happened. We get angry and blame the government for trying to keep the economy alive yet we never get angry at those trying to sabotage it which forces the government to act stupid in response.
  • my123 4y ago
    > yet we never get angry at those trying to sabotage it which forces the government to act stupid in response. Not sabotaging. People need to save a lot to be able to retire properly afterwards. State pensions are often not remotely enough on their own. The behaviour on the savers' side is perfectly rational in that scenario.
• bradwood 4y ago
  Normal sovereign economies have 2 levers. Fiscal and Monetary Policy. The Eurozone doesn't have this setup as monetary policy is bloc-wide whereas fiscal policy is national. With these levers working at different scopes this problem will always exist. And it's not the first time either. Remember Grexit? Same thing then. We either need a United States of Europe with fiscal transfer between countries or the euro should be scrapped so we can go back to lira, marks and drachma.
  • lottin 4y ago
    This is true, but it isn't uncommon. Almost all countries have different levels of government - national, regional, subregional and municipal - all of which have some degree of autonomy with regards to executing their own fiscal policy, whereas monetary policy is always country-wide.
    • bradwood 4y ago
      Yes. But something like federal taxation can be used to effect this fiscal transfer. No such mechanism exists in the Eurozone.
  • cm277 4y ago
    That's not how the EU works. EU is driven by compromises between states. When a compromise is hard politically (like common debt was during Grexit) it gets shelved until a crisis rebalances things and a new compromise can be reached (as it was with common debt during Covid). So basically, if fiscal transfers are needed at some point to rebalance debt, we will get to that point and the EU will compromise again. Is there risk in this approach? absolutely, but it's pragmatic and based on a democratic process (the public opinions of all member states) rather than dogmatic based on some red/blue ideology/political split where compromise is unreachable, as in the US. In other words, even if the article is right, I don't necessarily see the trap; it's a trap now, based on current compromises. Those are (thankfully) elastic, as it's been demonstrated many times in recent history.
    • bradwood 4y ago