Parlez-Vous Central Banking?
By Adrian Ash
January 9, 2008
The Gold
Price in Euros says the ECB president is failing in his No.1
task...
The FINANCIAL TIMES just
chose Jean-Claude Trichet – head of the European Central Bank
(ECB) – as its "Person of the Year, 2007".
Okay, so Time magazine opted for Vladimir
Putin – the former KGB spook now rehearsing his puppeteer
skills at the Kremlin. But was the FT's short-list
really that bad? Couldn't Paris Hilton find a space in her diary
to claim the award instead?
At least the air-head heiress delivered as promised
last year, denting only good taste in the process. Monsieur
Trichet's inflated celebrity, on the other hand, now threatens
to cost the world dear...
Trichet's primary task as president of the ECB –
according to the very treaty that established it – is to
deliver "price stability" to the 320 million citizens
of the Eurozone (Malta & Greek-speaking Cyprus joined the
fun on New Year's Day).
Put another way, his official 2.0% annual inflation
target means €1.00 of living expenses today should cost no
more than €1.02 by this time next year.
But anyone shopping in Euros this Christmas,
however, found the cost of living 3.1% higher on average from
Dec. '06 – or so says the EuroStat agency. Europe's festive
inflation out-ran even November's seven-year record. It came
close to undoing almost 14 years of inflation-fighting by the
ECB and its pre-Euro ancestors.
And things had been going so well, too! For 2007 as
a whole, consumer price inflation in Europe averaged 2.14%. But
curiously, that's exactly the rate it hit in Sept. before racing
higher as Christmas drew nigh.
What changed in the summer of Trichet's star year?
"One of his strengths is his ability to manage a crisis –
he enjoys that," says Olivier Garnier, adviser to the ECB
chief in his former life at the French Treasury in the early
1990s. And by golly, but Trichet got a crisis to relish this
summer!
Relaxing in the sleepy French fishing port of
Saint-Mâlo, Jean-Claude Trichet awoke one August morning to
find "the first financial market crisis fought by
BlackBerry from the beach" surging across the Atlantic
towards him, gushes the Financial Times.
"As the ripple effects of the collapsing US
subprime mortgage market caused global finance to seize up, the
ECB announced it would unilaterally pump in unlimited overnight
liquidity: in the end it added almost €95bn ($136bn, £69bn)...
"Initial shock at this unexpectedly radical
intervention gave way to admiration of [the ECB's] steady
hand," the newspaper goes on, hardly able to contain its
praise...
"As the drama unfolded, the ECB appeared to be
setting the pace among central banks. In the ultimate
compliment, the venerable US Federal Reserve and Bank of England
copied the tactics of an institution not yet 10 years old."
Hurray for Trichet – and three cheers for
unlimited liquidity!
Hosing Paris and Frankfurt with overnight loans,
Monsieur Trichet secured his place in history as "one of
the few to emerge from the turmoil with his reputation
enhanced," the FT declares. He certainly helped
save the blushes of BNP Paribas, proximate cause of the
interbank lending panic when it suspended three investment funds
on 9th August after the "complete evaporation of
liquidity" in the subprime US mortgage-bond market.
But our brave little pompier actually hosed so much
cash into Europe's money market, he's since felt the need to mop
up the puddle 14 times in the last 14 weeks, draining a total of
€390 billion in Christmas week alone.
In the 456 weeks between the ECB's birth and
October, by contrast, the Bank only drained "excess"
liquidity from Europe's money market a total of 21 times,
offering government bonds in exchange for cash.
It's a pity, in fact, that Monsieur Trichet didn't
think to take a couple of Euros out of the market before this
summer's turmoil began...
Under the European Bank's first president,
"Dim" Wim Duisenberg, the ECB's open-market liquidity
auctions averaged €64.6 billion. Since "Tricky"
Trichet took over on 1st Nov. 2003 that's more than trebled to
€204bn.
Indeed, our chart seems to show how the real hosing
came to end when the world's money-markets froze back in August.
But the number of ECB auctions helped pick up the pace, reaching
7.8 on average per month vs. 5.5 averaged per month during the
preceding eight years.
The average value also rose, meantime, increasing
from €130bn between 1999 and summer 2007 to €136bn at the
end of last year.
Did the flood of liquidity help save the world's
financial system? Was it even needed? Funnily enough, as Trichet
himself said to the European Parliament on 19th Dec.,
"there has been little evidence that the financial market
turbulence since early August has strongly influenced the
dynamics of broad money and credit aggregates.
"Indeed, the expansion of loans to households
and non-financial corporations has remained robust, which may
suggest that the supply of credit has not been impaired."
Mais bien sur, Monsiuer le President!
Controlling the Eurozone's money supply is supposed
to make up one-half of the ECB's policy tool kit.
Indeed, capping the number of monetary units in
circulation used to be the "first pillar" of the grand
anti-inflation stance it adopted at the dawn of Christendom's
third millennium.
But the idea of actually using Bundesbank-style
discipline to deliver German-style low inflation soon lost out
to watching "broad economic data" instead. Now playing
second-fiddle to what Wolfgang Munchau of the Financial
Times tellingly calls "the real world view" of
economic growth, consumer prices and trade-weighted exchange
rates, the ECB's initial money-supply target – under which the
broad M3 measure of liquidity would grow by no more than 4.5%
per year – has quietly slipped from the ECB's speeches, press
releases and official statements.
Unloved and un-mentioned, it's come to look like
some ridiculous ex-spouse...still bent on sending a Valentine's
card each year but using his left hand to scrawl "Guess
Who...?" Since the Euro became flesh at the start of 2000,
however, actual growth in Western Europe's money supply has
outpaced the "reference value" by more than one-third.
It met or fell below that target for barely 10 months.
And right now the quantity of Euros in circulation
– both physical and digital – is growing two-and-a-half
times faster than the ECB's initial prescription, taking the
Eurozone back to the runaway credit inflation of the late 1970s.
No wonder then that "at a global level, the
risks for [price] inflation are on the upside," as Monsieur
Trichet told the Bank for International Settlements (BIS) this
week in Switzerland.
No wonder either that the Gold
Price in Euros has exploded as a result. The citizens of
France, Germany and Italy saw the Gold
Market scoot higher towards €600 per ounce as Monsieur
Trichet's year of 2007 reached its end.
Will his policies at the ECB cap inflation – and
stall the surging value of Gold
Prices – in 2008? Here at BullionVault,
we think a fireman hosing a burning house with kerosene would
have more chance of saving the furniture.
"There is a danger of second-round effects on
headline inflation," as the FT's Person of the
Year told the Bank for International Settlements in Basel this
week. Perhaps he was thinking of Berthold Huber – head of
Germany's IG Metall union – promising his members "a mega
year" for pay awards, starting with demands for an 8%
increase in the steel sector.
Or maybe Jean-Claude Trichet was thinking of the
six public-sector unions now threatening to strike over higher
wages & pensions in his homeland, France...or the failure of
above-inflation pay awards in Italy's public sector to prevent
fresh strikes this month...or maybe the current wage-talks in
Spain, where annual pay awards are still linked to inflation –
which is currently running at 4.1% from this time last year.
In Germany, even the very poorest workers – those
who "suffer most from inflation" according to Trichet
himself in an interview with EuroNews last year – have come to
expect an inflation-beating pay rise this year. The Social
Democratic Party is pushing for a minimum wage of €7.50 per
hour (some $11) in the world's third-largest single economy.
Sharing power with Angela Merkel's Christian Democrats in her
"grand coalition", the SDP might just force the issue,
too.
Several big unions, however, are pushing for an
even greater "second-round effect" of the ECB's failed
inflation-busting worth a massive €11 per hour (more than
$16).
In short, "there is no room for complacency
[on inflation]," as Monsieur Trichet, a former member of
France's militant PSU party, told his audience in Basel. But
what else beyond complacency would explain the surging M3 money
supply...now growing fast enough to match the surging rate of
monetary expansion in the United States and not far behind the
wanton inflation of Britain and China?
It's the poor – and the poor middle classes,
especially pensioners on fixed incomes – who pay most when
money loses its value. Top earners, led by Europe's hottest
financial hot-shots in Frankfurt and La Defense, can look after
themselves.
Not least with a flood of short-term central-bank
loans so great that the wave of liquidity needs mopping up by
the very firemen themselves!
So for all the good he's done defending the value
of Euros, Trichet may seem a weird choice for "Person of
the Year, 2007". But for saying one thing and doing
another...and for helping the forces of inflation to mass, even
as he claimed to stand firm against them...he has corralled the
spirit of our financial age better than even Ben Bernanke at the
US Federal Reserve.
Jean-Claude Trichet – truly the man of the
moment.