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Inequalities might lead to an end of the Eurozone


The fall of the Berlin Wall in 1989 showed that the time for much closer, stronger European bonds had grown near. Hopes for a peaceful and prosperous future were higher than ever, among both leaders and citizens. This led to the signing of the Maastricht treaty, which formally established the European Union in 1993 and created much of its economic structure and institutions – including setting in motion the process of adopting a common currency, the euro.

The eurozone structure

The basic idea behind the structure of the Euro was that self-regulating markets would ensure prosperity across the Eurozone as long as:

  • Inflation was kept in check by the European Central Bank
  • Member States had fiscal discipline, keeping their public deficits and public debt low

For these purposes, the European Central Bank was given a sole mandate to hit a 2% inflation target – regardless of patterns of unemployment and economic activity across the Eurozone. Unlike other Central Banks such as the US Federal Reserve, its mandate does not include ensuring price stability and guaranteeing full employment. Only the former is within the realm of its mandate.

Similarly, the Stability and Growth Pact required member states to ensure that their public deficit was kept below 3% of their national income (GDP) and their public debt did not exceed 60% of GDP.

The crisis

Since the 2008 crisis, the Organization for Economic Cooperation and Development (OECD), the European Commission, the National Institute of Statistics and Economic Studies, along with other statistics institutions within the European Trade Union Confederation, have all agreed on this fact: In recent decades, social inequalities have increased significantly across Europe. And not only in Greece or Spain: the situation is the same in Sweden and Germany. In the past twenty-five years Swedish society has experienced a considerable growth in inequality; according to the OECD, between 1985 and 2008 the country recorded the highest growth of income poverty among industrialized countries.

After its implementation, the euro fairly quickly became the second most important currency in the world, but as of 2015, it has failed to supplant the U.S. dollar at the top of the world’s monetary heap.  Continue reading Inequalities might lead to an end of the Eurozone

Financial Warfare and the Destruction of Greece as a Nation


Syria is destroyed by military means. Greece is literally destroyed as a nation, as a society and as a state, by its own “partners”, in alliance with international Finance and its representative par excellence, the IMF and with the consent of the USA administration (1) Continue reading Financial Warfare and the Destruction of Greece as a Nation

The Limits of Monetary Policy


There was nothing very surprising in Mario Draghi’s ECB press conference. He promised to ease more. There was nothing very surprising in the market response. Previous announcements of easing have been accompanied by rising asset prices. This is not illogical as the tools being deployed involve printing money to purchase assets. This has both direct and indirect (positive) effects on asset prices.

Like Pavlov’s dogs that were conditioned to salivate on the sound of a bell (on expectation of food), so the markets salivate when they hear ‘more easing’. There is no doubt more easing will follow from the ECB.

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The object of ECB policy is not however asset price inflation. It is goods price inflation. Asset price inflation is a channel through which the ECB hopes to influence goods price inflation. Is this channel effective?

Low interest rates and Quantitative Easing have been features of the monetary policy seen globally since 2009. Asset prices have soared since 2009. Inflation is nowhere in evidence. In fact we have experienced deflation, a great deflation.

Now many bankers would dispute this assertion. Inflation has flatlined close to zero but has not been negative for long periods. Moreover, measures of so-called ‘core’ inflation have been higher. All true enough but rather missing the point.

The intensity of the global inflationary shock that was caused by the 2008 financial crisis was bigger than anyone seems to have grasped.
It would have been much worse had certain actions not been take. One grossly misunderstood action was bank recapitalisation by governments. This protected the unsecured depositors and senior bond holders:
Imagine a global experience like that of Cyprus in 2013. Cyprus currently has 70% loan delinquency with 59% categorised as serious.

  • -Bank shareholders globally lost money.
  • -Banks contracted staffing levels.
  • -Junior bond holders lost money.
  • Unsecured depositors remained untouched (except in Cyprus). Today Lloyds bank shares trade above the price at which the UK government purchased them. Who got bailed out at the expense of whom? Nevertheless, the reaction of the peanut gallery to the so-called bank bailout jaundiced attitudes to banks. There was a strong reaction to ‘too big to fail’ classification of banks. All this did was put unsecured depositors potentially at risk thus instantly degrading the practice that all bank deposits are money. Insured deposits perhaps still are but unsecured deposits are simply that, unsecured loans to banks that you can access. An overnight collapse in the money stock. This exacerbated the initial inflationary shock is a less visible way.

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    Many dispute the materiality of the collapse in the money stock. After all QE put money directly into the system. The CB buys assets and gives cash to the holder. Many of these assets are risk free government bonds.

    What does the holder do with the cash? Put it in a bank as an unsecured deposit?
    QE removed risk free near money assets from the system just when they were most needed. How did this help boost inflation? It did reduce yields on risk free assets to very low levels and this affected the cost of borrowing. It does not however seem to have encouraged borrowing for investment in productive activity. The main effect seems to have been to boost purchases of other assets such as equities and property. Companies bought back their own stock rather than build new plant. So QE is good for asset prices but after 6 years we still have deflation.

    QE = Quantitative Easing: Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target.

    Monetary policy: is the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves).The Federal Reserve is in charge of the United States’ monetary policy.

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    Gestaltz

    There was nothing very surprising in Mario Draghi’s ECB press conference. He promised to ease more. There was nothing very surprising in the market response. Previous announcements of easing have been accompanied by rising asset prices. This is not illogical as the tools being deployed involve printing money to purchase assets. This has both direct and indirect (positive) effects on asset prices. Like Pavlov’s dogs that were conditioned to salivate on the sound of a bell (on expectation of food), so the markets salivate when they hear ‘more easing’. There is no doubt more easing will follow from the ECB.

    The object of ECB policy is not however asset price inflation. It is goods price inflation. Asset price inflation is a channel through which the ECB hopes to influence goods price inflation. Is this channel effective? Low interest rates and Quantitative Easing have been features of the monetary policy seen…

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