Central Bank Alchemy and more Negativity

It's been a week or so since our last post and May is lining up to be another case of capitulation. Capitulation on the inflation trade, capitulation on the growth trade and capitulation of the "world is normal" trade. And throughout this equities march onwards. Buy buy buy buy.

There's plenty being said at the moment about what other people think, to the point that TMM are getting quotosensitive (much like "photosensitive", but this brings us out in hives when we hear other people's opinions repeated as religious portents). If we want opinions from people who have just as little clue as everyone else then we will talk to ourselves thank you. We don't care what Bill or Warren or Paul or Roggoff or Rienhart or any pundit thinks. We should stop reading what other people think and start thinking for ourselves.

 Is this part of the Twitter problem? Recycling of thoughts diminishes the ratio of originality to quote to such a point it's not worth thinking for yourself? Or is it something to do with education? One of TMM's offspring was writing an essay last week and had an original thought to add but felt they couldn't because they had to reference all thoughts and ideas. "Reference yourself" we suggested. But no, a rare original thought bit the dust because someone else HADN'T said it first.

 The Roggoff Rienhart witch hunt appears to us to be more of a blame game in a world of desperation rather than anything important. Are people really not thinking things through enough for themselves, that a spreadsheet error can cause global policy error (this isn't rocket science). Oh actually scrub that, we've just remembered how the Buba work.

But, wow, imagine this ...

WEIDMANN: " Hey Wolfie, you won't guess what, I've just found a +/- error in cell A3, you know all zat shit about ze periphery and all zat austerity stuff, guess what?  We should be giving them MORE not less HAHAHAHA",
SCHAUBLE:- "No shit! That's hilarious! Do we tell Cyprus?"
WEIDMANN:- "Nah, fuck 'em. Let's tell zem we want a special haircut on ze depos, you know a "cyprus special", its like a normal haircut but twice the price and rubbish "
BOTH:- "MWUAHAHAHAHA"

Policy is not swung on spreadsheet corrections and if it is then it's time to change the policy makers.

TMM have been doing lots of pondering recently, mulling their own thoughts around and it's pretty hard not to just come out with a rehash of many themes we have posted here already over the past couple of years. So excuse the a number of back links. But one over-riding trend is the growing push against austerity. Populations get impatient and the data is still looking dire. Money multipliers are not working and the machine is grinding to a halt. Well that's the concern. Desperation is kicking in and any money that is being printed doesn't appear to be ending up where the printers would like it to. So today was another of those days when the world looks to the central bank wizards for results, but at this rate the great book of Central Bank Policy will one day be filed in libraries under "alchemy".

Dr Aghi, Abe and Bendrick hard at work -



So what did Dr Aghi come up with? On the face of it not a lot. A predicted 25bp cut and no special methods other than the special method of saying thalt he is prepared to use special methods. One of which is the much talked about possibility of negative rates -

"On the deposit facility rate, we said it in the past: we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. We will look at this with an open mind and we stand ready to act if needed"

Looking at negative deposit rates “with an open mind”? This has prompted TMM to go back to thinking about the if/how/why/whether they will be implemented. In this respect, a speech by Benoît Cœuré in February 2012 seems especially applicable and we wonder if Dr Aghi is paying direct reference to it - here is the link, along with some select sentences:


• From a technical point of view, there is in fact nothing that prevents central banks from paying negative rates for the security they offer to depositors, at least temporarily
• Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes.
• And there is a degree of hysteresis: a temporary situation of zero or negative interest rates can have long-lasting implications for banks and their trading incentives… The Japanese experience is of course relevant here. [9] Within three months of the introduction of the zero interest rate policy, the volume of transactions declined by around one-half and low turnover persisted until end-2006 when the zero interest rate policy was discontinued.
• Important market intermediaries, such as money market funds, could be driven out of business, as their business model loses profitability, for both domestic and foreign investors with excess liquidity may shift their investments to alternative, more profitable market segments.
• zero or negative interest rates may produce adverse effects on the profitability of commercial banks and financial intermediaries more broadly. In a financial crisis this can result in a credit contraction. All in all, the impact of zero rates on the profitability of banks remains uncertain and highly dependent, among other determinants, on parallel regulatory response.
• Overall, a switch to zero or negative interest rates bears some risks – mainly of a microeconomic nature – which would have to be weighed against potential benefits in terms of additional macroeconomic stimuli. It also has to be noted that such steps would be warranted only in the face of clear downward risks to price stability, which today are not present in the euro area. In particular, the discussion about deflation risks remains largely speculative.

For comparison, here are the ECB staff forecasts then and now:






Now, TMM recognizes that Euro area HICP inflation has been especially subdued recently. But even with these considerations, the ECB would have to sharply change the definition of ‘downward risks to price stability’ for negative rates to be justified given current forecasts, assuming it is still using the above prerequisites. Of course, it is possible that the ECB council has internally relaxed its criteria for negative rates – but that does not yet appear evident based on ECB member speeches.

But all this has led us back to looking at the effects of negative interest rates and some of the possible consequences, however we have discussed most of those HERE (Was that nearly a year ago already? Don't crises drag on?). But we were particularly reminded of this post by Cœuré's line "Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes" which prompted us to think of ways of making holding cash even less attractive.

 Other than those listed in the previous post we suddenly had a Eureka moment that unifies an old anthropological conundrum of the small Micronesian Island of Yap with todays ECB policy dilemma. If you really want to make cash unattractive as a handy medium of exchange then you can't do much better than the Rai Stones of Yap . It is therefore obvious that the origin of these stones was a case of runaway deflation caused by a tribesman incentivised by large bonuses, leveraging his balance sheet by using complex derivatives to the point of creating a credit bubble resulting in a deflationary economic collapse and the implementation of negative rates on cash deposits by the Yapese central bank followed by the logical introduction of the most useless form of cash on the planet.

So TMM would like to introduce you to the new 1 Euro coin.

And how it will be used:-

The ECB committee popping out for a box of matches.