Credit deflation and the reflation cycle to come (part 2)

[Paulie]

10 hours ago, spygirl said:

Germany has lost patience with QE: that spells big trouble for southern Europe

Read this exclusive extract from our Economic Intelligence newsletter and sign up at the bottom of the article to get it every Tuesday

AMBROSE EVANS-PRITCHARD8 September 2021 • 5:00am

Bundesbank chief Jens Weidmann now has a vocal chorus of allies openly calling for tapering

Germany’s long-simmering anger with the European Central Bank is again coming to the boil. It is hard to justify perennial bond purchases and negative rates when German inflation is near 4pc and rising, the highest since the Reunification boom in the early 1990s.

Political realities are forcing the ECB’s ultra-dovish governing council to prepare for bond tapering sooner than it wants – and sooner than it should, if you are a New Keynesian – in order to head off a bust-up with Europe’s anchor power.

It will have to start pulling away the shield that has protected the high-debt Club Med states from market forces for almost seven years, and that has conveniently covered their entire borrowing requirements under the cloak of “monetary policy”. The first treacherous step could happen as soon as Thursday.

It is this monetary tightening in conjunction with parallel moves by the US Federal Reserve that poses the chief risk to overheated global asset markets, not the Delta variant.

German irritation should not be underestimated. The German Centre for European Economic Research (ZEW) this week published an extraordinary paper, more or less alleging that ECB governors from the high-debt states are exploiting quantitative easing in order to bail out their own insolvent governments, and doing so in violation of EU treaty law.

It says the southern governors are acting as de facto proxies for their finance ministers in a monetary union that has fallen captive to “fiscal dominance”. It suggests that the ECB is continuing to purchase bonds at this juncture “because otherwise some euro states could run into acute financing problems”.

I would qualify this. Some governors vote with the doves even though they are not from high-debt states. They do so because they know that the euro will blow apart if the South is left to its fate. But the effect is the same: an easy money majority under Christine Lagarde is ramming through an inflationary policy against the express protest of German-led hawks in the North.
 

Eurozone inflation hits 3pc

Line chart with 8 lines.

% change in inflation vs the same month a year ago

View as data table, Eurozone inflation hits 3pc

The chart has 1 X axis displaying Time. Range: 2014-12-07 23:02:24 to 2021-08-25 00:57:36.

The chart has 1 Y axis displaying Inflation, % change year on year. Range: -1 to 4.

2015201620172018201920202021-101234SOURCE: Eurostat

Eurozone inflation hits 3pc

% change in inflation vs the same month a year ago

Inflation, % change year on year

End of interactive chart.

The ZEW’s caustic view is broadly shared by the German Council of Economic Experts (Five Wise Men) and most of the Ordoliberal establishment. Former Bundesbank chief Axel Weber said at a recent forum in Frankfurt that the ECB had lost the plot on inflation and would soon be forced to take “active measures” to contain the fall-out, including rate rises. That would hit complacent markets like a thunderbolt.

It is above all the view of Friedrich Merz, the designated “finance superminister” of the next government if the Christian Democrats keep power in this month’s election.

Mr Merz said the ECB had reached “the limits of its mandate” and was playing down evidence of surging prices in everything from the daily shopping basket, to rent, home prices, and filling up the petrol tank.

Inflation is particularly corrosive in Germany, not because of Weimar mythology but because just half the population owns property or equities. The other half rents for life and mostly keeps savings in bank deposit accounts. This half is being pauperised. Furthermore, negative rates are destroying the business model of the small cooperative and savings banks that provide 90pc of credit for the Mittelstand family firms, the backbone of the German socio-economic system.

Grumbling in Germany has long been a fixture of the eurozone. Nothing much ever happens. There was barely a hiccup after the German constitutional court ruled last year that the ECB was acting ultra vires and subverting the fiscal sovereignty of national parliaments.

Nor did anything happen when a group of elder statesmen warned that uncontrolled debasement is destroying the foundations of the German social market economy, and risks setting off a “social explosion”.

What is different this time is that inflation can be felt everywhere – gefühlte Inflation – and parts of the German economy are patently overheating. One can argue that the picture is more akin to stagflation as rising prices collide with slowing growth (due to supply bottlenecks) but this merely takes us back to the conflicts of the 1970s: Club Med central banks let stagflation run; the Bundesbank fought it.

ECB President Christine Lagarde has accepted the need for a 'local adjustment' in bond purchases, a euphemism for tapering CREDIT: REUTERS

There is a suspicion that QE is being used to fund German credits to southern Europe by stealth through the ECB’s Target2 payments nexus, with no democratic legitimacy and beyond the Bundestag’s budgetary oversight.

Germany’s Target2 credits have reached €1.1 trillion. The liabilities of Italy and Spain together exceed €1 trillion. The ECB says this is a mechanical side-effect of QE, but that is precisely the problem. Germany is being drawn deeper into a trap where it stands to lose ever larger sums if the monetary union breaks apart and Target2 debts are crystallised.

Events are nearing the point where Germany must either challenge this process or accept that it has lost control of the euro, and forever hold its peace.

Excess liquidity is in any case causing ever more surreal mispricing in asset markets. Last week the unthinkable finally happened: average real yields on European corporate junk bonds fell below zero for the first time.

Bank of America calls it the “last hurrah of the compression trade”. It reminds me of the Club Med compression trade just before the onset of the EMU debt crisis, when 10-year Greek bonds were trading like German Bunds with a risk spread of 21 basis points.

Such anomalies will become untenable once the ECB sets the hare running on tapering. Mrs Lagarde and her allies would prefer to delay this fateful moment but it is becoming too dangerous to keep swatting aside the objections of the northern creditor bloc. To persist would risk undermining German political consent for monetary union.

Germany’s rate of inflation rate has been increasing

Bar chart with 20 bars.

Year-on-year change in the consumer price index (%) 

Value added tax rates were temporarily reduced between July-Dec 2020

View as data table, Germany’s rate of inflation rate has been increasing

The chart has 1 X axis displaying Time. Range: 2019-12-26 05:16:48 to 2021-08-06 18:43:12.

The chart has 1 Y axis displaying

%

. Range: -1 to 5.

%Value added tax rates were temporarily reduced between July-Dec 2020Jan '20Apr '20Jul '20Oct '20Jan '21Apr '21Jul '21-1012345SOURCE: DestatisGermany’s rate of inflation rate has been increasingYear-on-year change in the consumer price index (%) 

End of interactive chart.

Bundesbank chief Jens Weidmann has been biding his time, repeating his mantra that “the ECB is not there to take care of the solvency protection of the states”, but otherwise waiting for the right moment to strike. He now has a vocal chorus of allies. The Dutch and Austrian governors are openly calling for tapering this quarter followed by a complete end to pandemic bond purchases (PEPP) by next March – though other forms of QE will drag on.

Bowing to the inevitable, Mrs Lagarde has accepted the need for a “local adjustment” in bond purchases, a euphemism for tapering. This is a critical turning point in eurozone history.

Tapering by the ECB is nothing like tapering by the US Federal Reserve, the Bank of Japan, or the Bank of England. The latter trio are lenders-last-resort for fully-sovereign countries that borrow in their own currency under a national treasury and cannot plausibly go bankrupt.

The ECB does not have powers to act as a lender-of-last resort, except when backing up a rescue by the eurozone bail-out fund (ESM), which requires the assent of the Bundestag and other parliaments. Member states such as Italy or Spain are no longer monetary sovereigns and can most certainly go bankrupt, as the Greek drama revealed.

Nothing has changed in this respect since the eurozone debt crisis. The EU’s decision last year to issue joint debt for its one-off Recovery Fund was a political coup for Brussels federalists, but it was not Europe’s ‘Hamilton Moment’ and did not mutualise national debts.

Club Med’s rising debt

Bar chart with 5 bars.

Southern European economies’ debt levels as a percentage of GDP

View as data table, Club Med’s rising debt

The chart has 1 X axis displaying categories.

The chart has 1 Y axis displaying values. Range: 0 to 250.

Debt as a % of GDPFranceSpainPortugalItalyGreece050100150200250SOURCE: EUROPEAN COMMISSIONClub Med’s rising debtSouthern European economies’ debt levels as a percentage of GDP

End of interactive chart.

While Europe is rebounding from the pandemic in better shape than originally feared, the Covid trauma has nevertheless caused a jump in Club Med debt ratios by 15 to 25 percentage points of GDP. The debt levels were high before. They are even higher now and the divergence with Northern Europe is even more extreme.

The combination of the ECB shield and Mario Draghi’s halo effect have allowed Italy to get away with an expansionary budget deficit of 12pc of GDP this year without a flicker of protest from bond markets. Yet the country will end 2021 with a debt burden near 160pc, a level unseen since the creation of the post-War Italian Republic, and clearly untenable for an ageing sub-sovereign with a near-zero productivity growth rate.

Quantitative easing has been suppressing the signals in Europe’s debt markets for so long that we have almost forgotten why it was such a life-saver. It has fostered an illusion that monetary union is at last established on a sound footing.

Yet the euro remains fundamentally dysfunctional, without a fiscal union or a genuine banking union to back it up, held together by bond purchases on the stretched margins of EU treaty law. Tapering could be a rude awakening.

Who'd have thought that the Germans would have created a monster.

I keep waiting for the Euro to die but still it lurches on through sheer bloody mindedness

[nirvana]

1 hour ago, spygirl said:

GS is not a CB FFS

the politicians are bought by the big banks you knobhead

[spygirl]

34 minutes ago, Majorpain said:

Target2 will be the Killshot for the average German, when they realise that they have been working hard so Italy/Spain can borrow to buy the goods.  And now they are going to default!  Oh well, they made the bed and now they have to lie in it.

Its the entire lot - France,Spain,Italy, Portugal, Greece

All the native dodge tax and hold infation/wage hedged assets - too much history of inflation..

Germans dont, as a rule. They are used to stable pries, so invest in productive assets - lending to banks who lend to German companies.

Socially, Germans work for the collective good and aim for long term returns. And expect the government to support that.

Med countries look to rip off everyone not in the family, government included.

The social-economic  models are so different, real ants n caterpillars.

 

 

 

3 minutes ago, nirvana said:

the politicians are bought by the big banks you knobhead

No they are not.

 

[nirvana]

9 minutes ago, spygirl said:

No they are not

here, now fuk off twisting my mello man lol

 

[Majorpain]

11 minutes ago, spygirl said:

Its the entire lot - France,Spain,Italy, Portugal, Greece

 

Technically yes, but the two Countries properly taking the piss are Italy/Spain.  Unless they continue to get bailed out by ECB the Euro is toast, and i have no doubt that the ECB will do whatever weaselly things it takes to keep it going as long as possible.

[Hancock]

Been a few comments on here about the young not wanting to work in certain jobs, unsociable hours etc.. Only way this is fixed is to write off all student debt, and lower the level for job intakes from degree level to GCSE's.

Below doesnt include VAT on goods, fuel tax, flights etc....

So no incentive to earn over £27,250.

Young graduates to pay 52pc effective tax rate after National Insurance rise

Tax grab 'kick in the teeth' for young people and makes it harder to get on the housing ladder

Graduates in their 20s have larger student loans and pay back higher rates

Hundreds of thousands of graduates face a 42.25 per cent marginal tax rate due to Boris Johnson’s social care raid, as ministers were on Wednesday accused of blighting the financial prospects of the young.

The decision to hike National Insurance Contributions (NICs) by 1.25 percentage points means that university leavers will from next year face an ever-steeper tax take.

From April 2022, a graduate on more than £27,250 will face paying 13.25 per cent in NICs, 20 per cent in income tax and 9 per cent on their student loan repayments on every pound they earn over this amount.

This applies to those who enrolled at university after 2012, when tuition fees were hiked to £9,000.

The marginal tax rate then jumps to 52.25 per cent for graduates earning between £50,270 and £100,000.

In comparison, a non-graduate earning up to £50,270 will pay just 33.25 per cent, while those earning up to £100,000 will pay 42.25 per cent.

The true rate of tax you pay

£12,570 = Personal allowance for 2022/23

£27,295 = Student loan threshold for Plan 2 ( i.e. Students on an undergraduate course after 1 September 2012)

£50,270 = Threshold 40% income tax starts to apply

It forms part of a wider £12bn a year tax raid, falling on employees, working pensioners and businesses, which will see Britain’s tax burden soar to its highest level in 70 years. 

The hike comes at a time when many graduates are already feeling the squeeze as a result of soaring house prices, slow wage growth and low interest rates, denting their ability to save. 

It is also likely to reignite calls for a rethink of tuition fees, which were tripled in 2012 as part of David Cameron’s university reforms. 

While supporters have consistently argued that higher fees are justified because graduates earn more on average over their lifetimes, this earnings gap is narrowing and is likely to come under renewed scrutiny given the widening tax gulf. 

Morgan Schondelmeier of the Adam Smith Institute told The Daily Telegraph that increased tax burden on young people threatened to “destroy” their ability to “accrue the wealth needed to ever own shares or homes or pay their way in this world.”

“Tax rates at the levels we're seeing cannibalise economic growth, and risk ruining the fortune of a whole generation while mostly white Britons of select classes inherit wealth ahead of them,” she continued.

“It is a break of the social contract and fundamentally unconservative.”

Echoing her concerns, Kate Green, the shadow education secretary, said: “Students leaving university face rising student debt, soaring rent and house prices and now being hammered by a tax rise which will cost them thousands. 

“Any parent wants to give their child a leg up as they leave education and start their adult lives, with this tax rise the government will hold them back.”

Separately, Clive Betts MP, the chair of the Commons housing and local government committee, warned it was likely that local authorities would still have to hike council tax to fund social care. 

While the Government’s tax increases will raise £36bn over the next three years, only £5.4bn of this is due to be allocated to social care over the same period.

Mr Betts added that councils had seen their budgets "unfairly cut" in the last 10 years, and that there was a social care funding gap of between £2.5bn and £4bn a year which needed to be addressed.

"We have had 5 per cent council tax precept increases year-on-year and a lot of it has been to fund social care. So we are going to get it again are we? Above inflation council tax increases, and if we talk about the regressive nature of national insurance payments then council tax is regressive now as well, that is the reality."

[geordie_lurch]

16 hours ago, geordie_lurch said:

I smell a severe drop in most things incoming this week as people digest the news out of America here via ZH - there are now a record 2.2 million more job openings than unemployed workers

Well today seems to be a sea of red so far and if Evergrande is as important as people are speculating I might trim a lot of my positions and add some stop losses before the weekend

[DoINeedOne]

Interesting Twitter Thread on Evergrande

 

[invalid]

On 01/09/2021 at 10:48, Cattle Prod said:

 that's pretty funny too.

I've spent a fair amount of time in the Arctic, and sub arctic oil towns, and I think you get used to it. The other thing is the right clothes. I genuinely didn't feel cold with baselayers, proper boots and a parka. Your Canadian coppers seem a bit overzealous, they should give trying to catch a load of drunken oil workers in minus 25 a go! I slipped a fair bit too, as there was a layer of ice under the snow from the first freeze and wearing spikes was a pain in the arse. Re-reading what you wrote, my blood is running a little cold tbf ... but you don't think of it at the time.

I could think of worse places to be than snowed in in a well insulated Canadian cabin with months of food supplies and timber all round. If gas does run short at any point and our cosseted benefit class gets cold for a night, some of our lovely cities are going to explode @sancho panza

Edit

Before I get off the subject of gas, @DurhamBorn said something important about gas the other day: it's mostly in the wrong place. I've said here before it's not a true commodity in that it has very different prices around the world, simply because it's difficult to transport, and that won't change. It's not so easy to get extra gas if Russian pipelines are at full capacity: most LNG is sold on long term contracts, and spot LNG will be snapped up in any pinch. I think someone said on here the other day that home heating is about 75% gas boilers. So our winter heat is increasingly dependent on foreign supply, which the political establishment, media, and assorted crusties are trying to destroy. And believe me, it's working. I've never seen morale so low in the industry, people leaving, doing courses on carbon capture etc. Be careful what you wish for.

 

Do you have a good source for North Sea output? It used to be easy to find at one time but always seems to be buried or out of date these days. Is the output still trending down?

 

Was just taking a look at the Ofgem market indicators website, some nice graphs which I'll put below. Energy prices to the moon!

https://www.ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators

 

 

 

 

[HousePriceMania]

Bit of scraremongering from the banker in power

 

https://www.rt.com/usa/534283-yellen-treasury-debt-ceiling-fed/

 

US Treasury could default, Janet Yellen warns, calls on Congress to raise debt ceiling AGAIN

 

So they want more debt so they can pay the pay the debt.

The US is in serious trouble if this is the case

[HousePriceMania]

1 hour ago, nirvana said:

here, now fuk off twisting my mello man lol

 

The Dhragi one is crazy, he's not even elected !!!

Something stinks.

Dont forget Sunak and his mate now running the UK state propaganda channel.

[Hancock]

1 minute ago, Cattle Prod said:

That's a good point I hadn't thought of. Could explain the sideways consolidations in PMs. They'll need a catalyst for the QE, 10% down in the S&P would do the trick.

Mental, when what you're saying is in essence their policy.

Looks as if the world is opening up, but i do think they've one more shot at using covid to fill up the helicopters.

[Majorpain]

27 minutes ago, DoINeedOne said:

Interesting Twitter Thread on Evergrande

 

Quote

The top 200 Chinese property companies hold more than $5.5 TRILLION in assets at ~8x leverage. Meaning a 15% decline in prices across the board would make much of the industry technically insolvent.

So either property prices continue to rise, or the Chinese banks and economy start to implode.  Nothing printing moarrrr money wont fix!  

[nirvana]

9 minutes ago, HousePriceMania said:

The Dhragi one is crazy, he's not even elected !!!

Something stinks

amazing politician though, he ran the ECB with finesse, knows how to talk proper good BS

Lagarde is a useless bitch in comparison but she thanks us all for her many diamonds

ECB day today if you're wondering why the markets might be getting frisky 

 

[HousePriceMania]

7 minutes ago, Cattle Prod said:

That's a good point I hadn't thought of. Could explain the sideways consolidations in PMs. They'll need a catalyst for the QE, 10% down in the S&P would do the trick.

reminds me of this classic....

 

[DurhamBorn]

The thing to remember with the tax increases etc are that they wont solve anything and just give more fuel to an inflation feedback loop.

Remember as well,we have always said this will be a distribution cycle.That means people selling down assets and savings just to try to standstill on consumption.The dis-inflation is reversing.

One way to play this is to own income producing assets in better positioned areas like Asia.Lots of value in China in sectors that do well from lower to middle income growth.Trusts are the way in to spread risk.

Outside of trading we need to try to capture the inflation and hopefully leverage it in some areas.

Inflation is going to be much more broad based than people think.The government is enemy no1 now to anyone working or with saved labour and its not just about returns.Getting positioned to  avoid as much of their theft as you can is critical.

Its fired me up and im now removing my whole family from income tax through SIPPs etc.Im also looking with my dad at some property with more land where we can live together and cut the council tax down.Iv cut mine this week by 25% as my partner now lives with my dauaghter and son in law on paper  ,im also seeing an old mate at the weekend and il be running my old Pug on cherry diesel.

 

 

 

 

[HousePriceMania]

3 minutes ago, nirvana said:

amazing politician though, he ran the ECB with finesse, knows how to talk proper good BS

Lagarde is a useless bitch in comparison but she thanks us all for her many diamonds

ECB day today if you're wondering why the markets might be getting frisky 

 

When you are willing to appoint a convicted criminal to the head of the ECB then something is far far far wrong

https://www.independent.co.uk/news/world/europe/christine-lagarde-convicted-imf-head-found-guilty-negligence-fraud-trial-a7484586.html

Christine Lagarde convicted: IMF head found guilty of criminal charges over massive government payout

Was she the only person willing to screw over millions of people ?

We really do have a massive problem and it stems from the banks.

 

I read an article years ago it was along the lines of....every few generations the bankers get let off the leash, they then do what they are dong now...it all collapses ( they make off with the loot ) then the people turn on them and/or the people they perceive at the cause of the economic catastrophe left behind ( like Germany 1940s for example )

Meanwhile, the real people in charge have recharged their coffers for another century and it's off to Eton their children go.

 

[HousePriceMania]

10 minutes ago, Majorpain said:

So either property prices continue to rise, or the Chinese banks and economy start to implode.  Nothing printing moarrrr money wont fix!  

Sounds very familliar.  It's like the same bankers are in charge across the globalized globe

[nirvana]

3 minutes ago, HousePriceMania said:

We really do have a massive problem and it stems from the banks

aye this, everything is a problem of too much printing press and the politicians, big corporates and now big pharma with convid, making out like bandits..

I still blame Thatcher myself 

[Hancock]

5 minutes ago, nirvana said:

I still blame Thatcher myself 

She's started it all off, the rest just followed her lead.

The only PM in my lifetime that can take slightly less blame is John Major; the man who is was in power for the only true recession in the last 30 odd years.

One reason why the 90s was such a good time to be young.

[nirvana]

1 minute ago, Hancock said:

She's started it all off, the rest just followed her lead

aye this, Blair got most of his shite by copying the yanks too....

Petrodollar has fukked up everything, folk can't see it though, let's just poke fun at Europe instead eh?

#mustescapefatcuntisland 

[Hancock]

Just now, nirvana said:

aye this, Blair got most of his shite by copying the yanks too....

She took charge at the time when the UK was still relatively rich, in that it had a world class manufacturing base owned half the houses, all utilities and a fuck load of oil and gas.

She talked a good game, but when you scratch the surface her idea of capitalism was flogging state owned assets on the cheap to the well to do; which is not a whole lot different to the last 18 months where its been printing money to give bungs and inflate asset prices for the benefit of the well to do.

Nothing has really changed, apart from the fact they're not bothered about hiding the fact they're a bunch of thieving totalitarian bastards.

[jamtomorrow]

19 minutes ago, Cattle Prod said:

I've been saying for a while, make sure you have a backup plan! Here's AEPs view, good to see it out there in the MSM, as it's a dangerous situation we are sleepwalking into. Bolds for the skim readers:

https://www.telegraph.co.uk/business/2021/09/05/energy-rationing-feared-russias-gas-squeeze-exposes-uks-perilously/

3% reserves, and most of that in pipes, instead of 20%. Well done, government! And the only company with the experience of how to increase those reserves is...Centrica. You'll notice that Gazprom is honouring contracts, as they always do. They're just not adding the extras that the EU has become accustomed to. Sounds to me like they should have signed more contracts while gas was cheap...but it was a dead fuel, on the way out, right? Gazprom will name their price. And I can believe the UK doesn't understand they are dependent on Russian gas through the Netherlands, not many people know that one of the biggest gas fields in the world one lay under the Netherlands. An ocean of it, called Groinningen. They hit the jackpot - remember that the next time they start banging on about their superior agriculture, it was all heated and fertilised by this gas. Anyway, they drew down the gas hard so much that the land started subsiding and triggering earthquakes a few years ago, and the Dutch govt shut it largely down. That's another one off, gone for good. I'll be depending on my wood supply more than spot LNG cargoes this winter, it's an utterly stuid way to run energy policy. Spend 5 years trashing the industry that provides most of our energy? Enjoy being cold.

It's the poor bastards in modern slave boxes I feel sorry for. No chimney, no backup

[Sugarlips]

37 minutes ago, Hancock said:

She took charge at the time when the UK was still relatively rich, in that it had a world class manufacturing base owned half the houses, all utilities and a fuck load of oil and gas.

She talked a good game, but when you scratch the surface her idea of capitalism was flogging state owned assets on the cheap to the well to do; which is not a whole lot different to the last 18 months where its been printing money to give bungs and inflate asset prices for the benefit of the well to do.

Nothing has really changed, apart from the fact they're not bothered about hiding the fact they're a bunch of thieving totalitarian bastards.

She made a good call by pulling the funding on DeLorean as soon as she got in, couple of great doco’s on Netflix that cover it.

[nirvana]

26 minutes ago, Cattle Prod said:

And the only company with the experience of how to increase those reserves is...Centrica

hmmm, nah.....