Euro wins and Doug Noland agrees with me, no doubt we are right!
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Surely not coincidently, the day following the Fed’s pronouncement the European Central Bankers made some strong statements related to deflation and sound central banking. The ECB’s views are worthy of our attention. Reading and listening to recordings of their comments, I was again struck by the Stark Contrast to the economic drivel expounded by Chairman Greenspan and many of our central bankers. The ECB today is notably informed, astute, focused and disciplined. As central bankers should be, they remain cautious and conservative. But I also sense an air of confidence becoming of an institution that has achieved the status as the world premier central bank. And to appreciate the grounded nature of their monetary analysis and discourse is to recognize that the ECB is clearly winning the battle to manage the world’s premier currency. Contrarily, the soundness and purchasing power of our currency has been severely and irreparably damaged. The Greenspan Fed is contemptible.
To illuminate The Stark Contrasts Between Competing Central Banks, I thought it worthwhile to include some pertinent comments made yesterday by ECB officials.
ECB President Wim Duisenberg: “The reasons for not cutting rates were manifold. We need more information about whether recent developments – in particular the exchange rate – will continue or peter out or reverse. We have to know more.”
Wim Duisenberg: “Since the end of the war in Iraq, financial market volatility has declined significantly, with a notable increase in stock prices. Nevertheless, there continue to be downside risks. First, there are the risks originating from the past accumulation of macroeconomic imbalances outside the euro area, and lately concerns have arisen with regard to the SARS virus.”
Wim Duisenberg: “We explicitly do not have an activist short-term oriented policy. We do not want it.”
My comment: It is the nature of successful central bankers to remain cautious and conservative, with a focus more directed toward monetary stability than economic expansion. Goals are always long-term and policy is necessarily gradual, incremental, and non-experimental. The ECB would simply not attempt “activist” policies to manipulate long-term interest rates or to stimulate short-term output growth. Their overriding focus is on systemic, broad-based monetary and price stability. The Fed, on the other hand, has for too long acquiesced/accommodated acute monetary instability in hasty pursuit of short-term economic catalysts. This is a losing game and anathema to prudent central banking. It is also interesting to note the ECB comment, “There are risks originating from the past accumulation of macroeconomic imbalances outside the euro area.” As consummate central bankers, the ECB likely has a sound grasp of the nature and vulnerability of the U.S. Bubbles. They would, furthermore, not expect such “accumulated imbalances” to be rectified by continued loose monetary policy from the Federal Reserve. They want to have their house in order for the inevitable…
European Central Bank board member Eugenio Domingo Solans: “The situation we analyze today has factors in both directions. On the one hand it’s clear the euro has strengthened and the price of oil has fallen. In this sense, the outlook for inflation is better. On the other hand, the situation of liquidity, of M3 and other variables we also consider, reflect an abundance of liquidity.”
My comment: Recognizing the nature of contemporary, securities-based Credit systems, central bankers must carefully consider the impact of financial market liquidity and Credit availability. Excessive liquidity must be monitored carefully no matter what the underlying price trends in consumer prices. Indeed, Credit creation, and the resulting liquidity effects, must be the locus of monetary analysis and management. Problematic financial and economic imbalances, as we have witnessed repeatedly, emanate directly from Credit and liquidity excess. The enormous financial and economic risks in the U.S. today are much more associated with the consequences of continued Credit, liquidity, and speculative excess than they are with general deflationary pressures.
ECB President Wim Duisenberg (quoted by Dow Jones – Charlene Lee): “We also read our newspapers, and we see that here and there the word ‘deflation’ re-emerges. We do not share this fear for the euro area as a whole.
Wim Duisenberg: “To maintain price stability is defined as a rate of inflation of below two percent. There were views who pleaded for any even tighter interpretation. There were views who pleaded for a looser interpretation. In the end, we all agreed that we would have a big credibility problem and create our own credibility problem if we were to even change the definition. So there was quickly consensus that there was no need - that it would even be dangerous to change the definition.”
My comment: In Stark Contrast to the Federal Reserve, the ECB is absolutely determined to cultivate and safeguard credibility. As part of the Fed’s “activist” policy approach, our central bank has for too long nurtured and pandered to the leveraged speculating community. Yes, it remains an incredibly swift (although increasingly ineffective and destabilizing) policy mechanism (encouraging speculative purchases of U.S. Credit market instruments, immediately augmenting Credit availability). But the very nature of this mechanism nurtures asset Bubbles and resulting distortions – dysfunctional Monetary Processes. Moreover, it has placed the Fed in the dangerous position of being held hostage to the speculators, capricious financial markets, and destabilizing asset Bubbles. Importantly, this is precisely the slippery slope of central bank credibility destruction.
And while the leveraged speculators remain to this day a captive audience to Fed pronouncements and policies, there is no doubt that the Fed’s status is in freefall with true (especially foreign) investors. There will come a day when the manipulative Fed will no longer so easily hold sway over market perceptions (when real investors supplant the speculators as the driving force within the marketplace), and we will all dearly suffer from our central bank’s (and currency’s and markets’) tarnished reputation. This line of analysis recalls that a key attribute of the classical gold standard was that it was self-adjusting/correcting. Interestingly, in such a monetary regime speculators – placing bets that excesses and imbalances would be of a short-term nature and rectified either automatically or by determined monetary authorities – would actually be a stabilizing force. Contrast this to the current environment where the speculators are quite confident in the perpetuation of Federal Reserve monetary mismanagement. In this circumstance, they will place bets in the direction of continued excesses and imbalances, with speculation working decisively to further destabilize the system. Again, Stark Contrasts…
Otmar Issing: “There’s not the least evidence of deflation in the euro region at the moment.”
Wim Duisenberg: “In the sixteen years that I was governor of the central bank of the Netherlands there were two years that we had deflation of minus one-half, and I publicly declared that I had lived in the central bankers’ paradise.”
Question: “How do you solve the problem of (the weak) sectors that can go into deflation?”
Response from the ECB’s Chief Economist Otmar Issing: “The concept of deflation is not a question of sectors and countries; it’s a question of the (entire) monetary area. In all large monetary areas in the world there are regions that are slow and even sometimes negative developments in prices, and others which are higher. So this is not specific for the euro area, but has nothing to do with deflation. Deflation is a concept related to monetary policy for the whole entity - for the average of monetary area. Sector price developments, this is a question of relative prices. And it’s quite normal. For example, in the computer sector you’re at extreme declines. Telecommunications, this is daily lives and even strong declines in prices. This is a question of relative prices of a market economy. This is totally different from the concept of deflation…”
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