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Mario Draghi's Lies Annotated, And A Brief Glimpse At The Truth

Moments ago, the Goldmanite in charge of the European Central Bank delivered yet another speech, this time seeking to offset some of the hawkish comments over the weekend from his comrades, all of which suggested that no more easing, or public QE, was coming any time soon. It was, as usual, full of the same lies that have pushed European stocks to highs not seen since Lehman even as Europe's economy is now slumping into a triple-dip recession.

A choice selection (the full speech can be found here) from Bloomberg:

  • DRAGHI SAYS EURO-AREA RECOVERY LOSING MOMENTUM - translation: buy everything
  • DRAGHI SAYS ECB READY TO USE ADDITIONAL MEASURES IF NEEDED - translation: see above.
  • DRAGHI SAYS UNEMPLOYMENT IS UNACCEPTABLY HIGH - Europe's unemployed can get a job selling ABS to the ECB
  • DRAGHI SAYS RISKS TO EURO-AREA RECOVERY CLEARLY ON DOWNSIDE - courtesy of the ECB
  • DRAGHI SAYS ECB HAS REACHED LOWER BOUND ON INTEREST RATES - and has proceeded lower.
  • DRAGHI SAYS ECB WILL CLOSELY MONITOR RISKS TO PRICE DEVELOPMENT - as it creates a whole lot more risks
  • DRAGHI SAYS ECB HAS DONE A LOT OVER PAST 3 YEARS - Sure has; it has jawboned even more.
  • DRAGHI SAYS ECB MEASURES IN SEPT COMPLEMENT JUNE MEASURES - which compliment the ECB's OMT lies, er, measures
  • DRAGHI SAYS TLTRO TAKE-UP WAS WITHIN ECB EXPECTED RANGE - even if it was below the lowest Wall Street estimate and was dubbed a failure by everyone
  • DRAGHI SAYS TOO EARLY TO PREDICT IMPACT OF TLTROS ON ECONOMY - but perfect time to predict impact on peripheral bond yields
  • DRAGHI SAYS TLTROS HAVE ALREADY HAD IMPACT ON FINANCIAL MARKET - Yup: new multi-year highs.
  • DRAGHI: ECB HAS SEEN 'VERY MODEST' SIGNS OF CREDIT IMPROVEMENT - it is now declining at only 2% Y/Y
  • DRAGHI SAYS FUNDING CONDITIONS ARE ABUNDANT - or, as JPM says, a record amount of global excess liquidity
  • DRAGHI SAYS THERE IS NO `GREAT BARGAIN' ON ECB EASING - just a small one
  • DRAGHI SAYS UNDERMINING FISCAL RULES WOULD UNDERMINE CONFIDENCE - "get to work un-undermining confidence, Mr. Chairman"
  • DRAGHI SAYS THERE IS FLEXIBILITY WITHIN EU FISCAL RULES - illegal monetization of public debt is actually... legal.
  • DRAGHI: SOME NATIONS SHOULD GIVE PRODUCTIVE INVESTMENT PRIORITY - like China and the US
  • DRAGHI SAYS AQR, STRESS TESTS MIGHT HAVE CONSTRAINED CREDIT - you mean the ECB's Stress Test constrained credit?
  • DRAGHI SAYS HELPING GOVERNMENT BUDGETS IS OUTSIDE ECB MANDATE - so how long until the ECB proceeds to fund sovereign deficits and monetize public debt?

And now the pure idiocy:

  • DRAGHI: DIRECT INTERVENTION IN ABS MARKET CAN CHANGE DYNAMICS - with the ECB now the only buyer, what's a "market"?
  • DRAGHI SAYS ABS ELIGIBLE STOCK WILL GROW BECAUSE OF ECB BUYING - like loan creation will grow because of €1 trillion in LTROs
  • DRAGHI SAYS ASSET PURCHASES WILL SPUR PORTFOLIO REBALANCING - translation: buy spoos.

It gets better:

  • ECB WILL ONLY BUY ASSETS ELIGIBLE FOR EUROSYSTEM OPERATIONS

Such as olive tree-backed Greek Government Bonds.

Then this:

  • DRAGHI SAYS SUCCESS OF ECB MEASURES DEPEND ON OTHERS’ ACTIONS

When Goldman's ECB head screws everything up again, it will be up to the Fed to bail it out once again, just like in November 2011.

And finally, this which can only be defined as... epic:

  • DRAGHI: TAKES TIME FOR CONFIDENCE IN MARKETS TO REACH ECONOMY

No point to even comment on this bullshit.

It goes on and on, there is only so many lies even we can take. As for the truth, here is an excerpt from the latest lestter by Diapason's Sean Corrigan, which puts Draghi's predicament in perspective.

From Material Evidence By Sean Corrigan

Before the attention of the market was briefly occupied with digging up reasons to trade bonds according to the newly-discovered fissiparous tendencies of several somewhat indebted EU members, the main game in town was - once again – Mario Draghi, he of the surprise (if highly symbolic) rate cut and the gargantuan new bondbuying programme.

It almost seem a shame to quibble with a man of such eminence, but we do admit to just a little puzzlement as to the supposed efficacy of the measure (other than as another ‘Whatever it takes’ act of action-free neuro-linguistic programming aimed at pushing both the euro and bond yields lower as his colleague Coene openly admitted a few days later).

It goes like this:-

So, O Wise one, you will buy €700 billion or so of ABS - but only the good stuff, of course, or else Herrn Weidmann and Stark will again raise their eyebrows. However, this threatens to leave the dreck with the banks you are trying to sanitize (ahead of the upcoming Asset Quality Review, mutter the cynics).

But, far more important than that, when you buy the paper, you will credit banks with reserve balances as payment - the same reserve balances you have just imposed a deeper penalty, negative rate of 20bps on, remember?

So in a world desperately chasing yield, you hope to strip them of their best paying assets and then charge them for the privilege of holding the reserves for which you intend to swap them. In a Europe allegedly only being held back because banks either will not or cannot lend, you want to reduce their key net interest margin further and so slow down the rate at which they can accumulate the earnings with which either to boost their capital or pay down some of their existing bad and doubtful loans.

Just how is this supposed to work again?

And why now, in any case? In Spain real M1 is now running at 8.8% p.a., led by a double digit surge in deposit liabilities. In Portugal, the nominal increase in such deposits is motoring ahead at more than 13% yoy – the fastest pace in 12 years; in real terms, there is a 4% CPI difference to subtract, meaning today’s effective rate is even faster than it looks.

It may also be remarked that, for first time in a decade, Spanish households have more deposits at the bank than they do loans outstanding, having paid off (or defaulted on) a €1/4 trillion net adverse balance. Spanish Non-financial corporates, meanwhile, have cut this narrow reckoning of net debt in half to €365bln from over €750 bln at the peak, meaning they are now at their most liquid (or least leveraged) since the summer of 2005. As a combination, the non-financial private sector has sweated itself back from being €980 bln in the red when LEH struck to ‘only’ €366 bln offside. Six hard years may have passed but at least private balance sheets are €600 billion better off, a sum equivalent to some €13k per cap and not too dissimilar to a full year’s income.

Breaking it up differently, NFCs have paid down 40% of their bank debt or €385bln (accounting for 5/8 of the overall improvement), while Households have shed 14% or €125bln of theirs and meanwhile added 14% or €95bln to their deposits. We are almost getting to the stage, Signor Draghi, where what these people need in order to boost their spending power is an increase in rates, not a drop!

Let’s look at this another way, using data from the US to illustrate the point. Between them, the Commerce Department’s QFR tells us, corporations involved in manufacturing, mining, wholesale, retail, information, and the provision of non-legal professional services are currently recording around $13 .6 trillion a year in revenues and making just over $900 billion in after tax profits in the process. Operating costs amount to roughly $12.2 trillion. Interest expense - presumably one of the main ‘stimulus’ targets for an expansive monetary policy - aggregates to $260 billion, hardly a trifle but, you will surely note, a toll equivalent to just under 2% of revenues and just over 2% of costs.

Against this, profit tax (which that interest payment helps reduce, of course, hence further reducing its net cost to the borrowing firm) is an almost equal $250 billion while, scaling up from the numbers presented in the BEA’s NIPA table entry for ‘taxes on production and imports less subsidies’ (which are subsumed in the operating  cost figure given above), we can see that these typically range from 2 ½ to 3 times the income tax itself, meaning that these firms pay out anything up to four times as much to Leviathan as they do in interest, without even beginning to account for any of the other additions to other financial costs, for the legal hazards, the  restrictions on flexibility, the consumption of precious time, or the lowering of the critical entrepreneurial estimate of likely profit that government routinely imposes.

Do you just suppose, therefore, that there are much more effective ways for a state solicitous of its citizens’ well-being to give incentives to productive activity and hence to hiring – and ways with fewer toxic side effects, to boot – than by having its buddies over at the print shop screw around with the price of credit and the availability of money?

Ask yourself if a French entrepreneur is likely to set aside all his cares and dash out to his ABS-denuded bank in order to borrow the means to start or expand his business just because that bank, now desperate for some sort of earning asset on its books, will offer him a small discount on its previous charges. If it didn’t do much when we cut rates from 400 to 100 bps, or from 100 to 40, do we suppose it will really help if it now goes from 40 to 10?

No. But while the ECB – like its military Big Brother – remains another mission prone to undergo a nasty creep (it is exceedingly hard to resist the temptation to invert the word order in that last phrase), that will continue to be the only dead horse there is for anyone to flog. No wonder voters in Germany are stating to warm to the  appeal of the AfD, as its stellar showing in the Länder elections showed this weekend.

Meanwhile, despite the lowest nominal interest rates in the modern record and real ones two full percentage points below the ex-post mean of the quarter-century before the crash, Italian industrial output has fallen back to the post-LEH lows, back to where it was 25 years ago and not far above what it first briefly hit in 1980. For Spain read record low nominal rates, likewise; rates 1% below the mean in real terms, and IP still where it was last in 1994 and, before that, as long ago as 1987.

Too high interest rates (sic) are NOT the solution to this, though too low ones certainly contributed mightily to the problem!

Granted, the bigwigs of the ECB - and their illustrious peers elsewhere – do frequently play lip service to the question of ‘structural’ reform though in Draghi’s case this is dangerously entangled with his desire to resurrect some form of Istituto per la Ricostruzione Industriale via the proffer of state guarantees to SMEs, as well as to the banks buying lesser grade ABS in his new wangle, and also via that hoary old chestnut, the promotion of more public infrastructure spending (Europe obviously didn’t build enough roads-tonowhere, half-used velodromes, and cavernous provincial art galleries full of modernist kindergarten offerings over the late cycle of manically increasing indebtedness). For Draghi, it was revealing that this was a programme ‘essential’ – to quote the man himself – ‘to bring inflation where we would want to see it’ – i.e., higher!

But in all this, they – the unelected bankers - are either being foolishly naïve or treacherously disingenuous in that the obvious ‘public choice’ outcome is for politicians to do as little as possible of such heavy lifting for as long as the same central bank which is exhorting them so condescendingly to act simultaneously stands ‘ready to take further action if needed’ every time a hamstrung economy threatens to stumble once more in the face of their poltroonery.

Europe's current woes are not entirely economic, of course: there is that small difference of opinion on its eastern marches with a nation with which it had been in the habit of conducting some much needed, mutually enriching commerce and which was preparing to play a full part in erecting the New Silk Road to link Europe’s eager consumers and ingenious machinery makers to China’s throbbing industrial heartland, via the teeming natural resources to be exploited between them on the territory of a nation which a jealous hegemon has now deemed must be treated as an existential foe, not a prospective partner in restoring prosperity.

So, alas, the craven desire by its leaders to conform to the dictates of the worst elements of the US foreign policy bestiary has set the Union on a collision course with the Russians from which there are likely to emerge few winners, not least among those EU businesses which will lose both short-term sales – and possibly longer-term market share to Asian competitors – at the worst possible time.

Once again however, in a sign that the word of the bosses is no longer to be unthinkingly accepted no matter how unremitting the propaganda manufactured to support it, recent rounds of sanctions, coupled with a more sympathetic treatment of the desperate plight of the civilian populations of Donbass and Luhansk has emboldened several continental commentators to give voice to the proposition that this was a wholly unnecessary crisis; one triggered deliberately by the Americans; and one whose impact will only serve to strengthen the 'indispensable' nation's ill-conceived dreams of exercising Full Spectrum Dominance over the rest of us.

In this they have not been entirely alone, despite the stridency of the yellow press in its demonization of Vladimir Putin. Stephen Cohen, John Mearsheimer, Jack Matlock, Pat Buchanan, and naturally Ron Paul have been among the American heavyweights to hold their own country to account in this matter, so perhaps we, too, should pause to reflect on the fact that not only is this is decidedly not a comic-book war of our good guys versus their evil ones. Much less is it a dispute where we should allow some bureaucratic berserker-manqué puff himself up into a nucleararmed Popillius Laenas and start inscribing circles in the sand around his adversary's feet. This is not least because that latter might just feel pressured enough - or simply sufficiently exasperated at what he sees as the blind unamenability of his opponents to the norms of cold, hard Realpolitik, much less to anything as abstract as international law – to the point where he becomes tempted to step defiantly outside the ring without first agreeing to do the New Rome's bidding.

Perhaps Signor Draghi should be buying ABM’s not ABS’s and locking them away in the ECB’s vaults, if he really wants to do some good.