Currently, central banks around the world are walking in lock step down a dangerous path of money creation. Led by the Federal Reserve and the Bank of Japan, economic policy is driven by the idea that printed money can be the true basis of growth. The result is an unprecedented global orgy of currency creation. The only holdout to this open ended commitment has been the hard money bias of the German-dominated European Central Bank (ECB). However, growing political pressure from around the world, and growing dissatisfaction among domestic voters have shaken, and perhaps cracked, the German resolve. While German capitulations in the past have been welcome occurrences, in this instance the world would be better served if the Germans could stick to their guns.
Last week the statement issued by the Federal Open Market Committee (FOMC) put to rest any expectations that Quantitative Easing in the United States would be coming to an end anytime soon. With an ambiguous, but decidedly dovish statement, the stage appears to be set for an expansion of the $85 billion per month program. The statement further obscured the criteria that the Fed is supposed to rely on to begin a winding down of the program, leaving market participants increasingly uncertain.
Trying to outdo the Fed itself, the new leaders of the Bank of Japan have thrown all monetary prudence to the wind. Also, in just a few months Canadian Mark Carney, a dyed-in-the-wool Keynesian, is set to take the helm at the Bank of England. Taken together, these intentions would suggest that the world is set to take monetary expansion to a new level. The odd man out has been the ECB, which had long been dominated by the Germans. Over the past few years, the ECB has elicited the ire of Keynesian economists by offering to deliver fresh liquidity only in exchange for promises of fiscal restraint by the troubled Eurozone members. However, the massive pressure currently being placed on Germany appears to be overwhelming its resistance.
Within the seventeen member nations of the Eurozone, there are now some nineteen million unemployed, or 12.1 percent. In Greece, the unemployment rate is 27.2 percent; in Spain 26.7 percent; and in Portugal 17.5 percent. On the other hand, unemployment in Luxembourg is 5.7 percent; in Germany 5.4 percent and in Austria, 4.7 percent. This disparity is clear and increasingly affects politics. These tensions have resulted in a string of electoral victories by left wing parties in the southern tier. However, despite their resentment of the ECB, IMF and Germany, all have expressed a strong wish to remain within the Eurozone. (They seem to know which side of their brioche is buttered).
But the peoples of the northern core countries have begun to chaff at the yoke. The average German sees continued bailouts as a means to reward and support what they believe to be a slothful, and politically corrupt, southern fringe. As the crisis drags on, their previously ‘liberal’ impulses of support are giving way to deep resentment. Political parties calling for strict controls of bailout funding and immigration are growing in Germany, the Netherlands and even France.
However, the German elite has long seen the EU as an opportunity for acquiring the empire Germany has for so long desired. Historically, empires are paid for in treasure and blood. The carnage of two world wars may have dimmed their enthusiasm for blood, but it appears that the German elite are prepared to pay for a Eurozone empire with treasure alone. But with their own population unwilling to pay more for direct bailouts, and the indebted countries unwilling to tighten their belts, increased monetary flexibility may be the only means open to the Germans to maintain union.
Last week, EU growth projections were reduced by a further 0.1 percent to a negative 0.4 percent. Facing this grim reality and shrinking resistance from the dominant Germans, the EU bureaucracy appear to be becoming more lenient. Mr. Olli Rehn, the EU’s economic chief, had been expected to grant waivers of one or even two years for Spain, France and even the Netherlands to reduce their debt to less than three percent of GDP. And right on cue, the French finance minister declared just this past weekend that the”era of austerity” had come to an end by announcing that France would no longer abide by prior Eurozone debt limits in exchange for ECB bailout funds.
As a result, it appears likely that the ECB will begin falling into step behind the Fed and the banks of England and Japan to dispense substantial QE. With all of these central bank oars pulling in the same direction, I would expect an asset boom with financials, commodities and real estate rising strongly once again. Should that boom continue, expect the financial elite to celebrate unabashedly. This week, Bill Gross, the head of the massive Pimco investment firm nicely summed up the sentiment, “Pimco’s advice is to continue to participate in an obviously central-bank-generated bubble.”
I would remind all who would follow such advice to recall that the last two central bank-financed booms (Dot com and Real Estate) were brought to an end by spectacular collapses. The chances are that the next asset class to experience a similar trajectory could be fiat money itself. The fall of currency will be much more significant than falls in stocks or real estate.
Although we may all be very glad that the Germans of 70 years ago could not hold the line in Normandy, we may regret that their grandchildren could not resist similar international pressure on their monetary empire in Frankfurt.