In the weekend edition of the FT Olli Rehn, who sits on the ECB’s interest rate-setting council as Finland’s central bank governor, argued that changes in labour markets and the world economy had weakened wage inflation pressures, implying that the economy could cope with lower levels of unemployment without rapid inflation. Rehn elaborately bemoaned the fact that the inflation target of 2% is furthest from being reached despite negative rates and a gargantuan bond purchasing program.
Well, congratulations Mister Rehn, for finally comprehending the blatantly obvious dynamism that has shaped our globe across the past 15 years. Inflation has been hard to come by for very good reasons, among them significant demographic trends and technological advances, As if he has understood nothing that has evolved before his eyes, he and other colleagues now claim the ECB should take the lead from the recently adopted Fed strategy and indulge in letting inflation overshoot.
It would give the ECB more flexibility to continue buying bonds as the eurozone recovers from the pandemic fallout, or so the logic goes. This month, the ECB council is to hold a seminar on how monetary and fiscal policy are to interact to exit the crisis. Rehn employed the soccer analogy for the ECB playing the libero, roaming in the back and recycling stray balls back to the economic front line. One wonders sometimes what policymakers come up with.
In other words, the Finnish ex-fiscal politician turned central banker is trying to make the scene for much greater monetary accommodation than we already have. Most curiously, however, he added that it was very important for governments to plan to reduce their surging debt levels. Hold on, what is Rehn saying? Does the eurozone need more fiscal stimulus to escape the pandemic slump, and is the ECB to accommodate such action… or not? What is it?
Anyway, until we figure out what the Finnish authority actually means, let’s have a quick look at the numbers to highlight yet again such an absurd foray. At the end of calendar week 17 this year the ECB’s balance sheet continued its vertical move and swelled to a new all-time high of 7.57 trillion, an increase of 2.22 trillion year-on-year! That is to say that the monetary fight against the pandemic has so far caused an increase of 42% in central bank assets.
This in itself is not the problem. It proves that the ECB is on the front foot to provide ample excess liquidity to the system. The issue, however, is that this is being done to literally zero avails. Have banks created a multiplier effect as is their roles in an economy? No. Have those banks’ lending volumes gone up? No. Has the velocity of money increased? No. Are economies in the eurozone recovering? No. So, what’s going on? Where are the funds going?
As I have pointed to before, most recently
here, commercial banks simply do not want the additional ECB funds, at whatever ridiculously low interest rates. Almost none of it is been channeled into the economic process. Rather, it is recycled back to the ECB and hoarded as deposits, at the spectacularly punitive cost of 50bp. A total of 4.24 trillion Euros are being held there. This is utter madness, as in normally functioning systems no more than a few hundred billion are required to safeguard goods and capital markets.
It represents the ultimate merry-go-round of excess liquidity a central bank is meant to produce supporting an ailing economy. And Olli Rehn wants more of it, to lead the eurozone money system more ad absurdum. What are the people in the ivory tower thinking?
