Germany has lost the QE fight

Now the ECB will follow the US by forgetting moral hazard and simply giving money to those who wasted it in the first place.

The Swiss National Bank’s capitulation last week is a clear sign that the Germans have lost the argument and that the euro will be dragged down by quantitative easing in Europe.

First, there was the European Court of Justice ruling last week that it’s OK for the ECB to buy bonds in the secondary market. Next, on Thursday, will probably come full QE, with forecasts of up to a €2.3 trillion liquidity injection by the beleaguered central bank through the buying of sovereign bonds directly.

Germany has been trying to stop this for years, but with inflation falling to minus 0.2 per cent and five-year inflation expectations remaining negative, the fight has clearly been lost.

The Swiss have concluded that buying euros now is a mug’s game and a guarantor of big losses. Managing an economy with fabricated exchange rate never works anyway.

Take note, Reserve Bank of Australia. At least the RBA doesn’t try to peg the Australian dollar when it complains it is overvalued, it just ‘jawbones’.

The Swiss will now return to their old ways of sound money, balanced budgets, no debt and neutrality in the currency wars, but it will be painful, especially now that the euro is to be debauched.

The market will set the Swiss exchange rate, and the fact that investment bankers have lost fortunes by last week’s sudden 20 per cent revaluation is just the way it goes.

Interesting, therefore, that the world’s capitalists are preparing to gather in the Swiss ski resort of Davos this week for the World Economic Forum, having just had a Swiss lesson in the cost of true free markets.

In the end notes to his 1936 General Theory of Employment Interest and Money, Keynes referred to “the euthanasia of the rentier”, by which he meant the suppliers of capital -- in other words, savers.

In fact, he advocated euthanasia, as he put it, of “the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital”.

He described the ‘rentier phase’ of capitalism as transitional and thought we should aim at “an increase in the volume of capital until it ceases to be scarce”.

Yes, well, that went well in 2008, when bankers’ poor decisions came home to roost, capital dried up and brought the world economy to its knees. Sometimes capital becomes scarce because bankers stuff up.

Ever since then the Federal Reserve has focused on baling out the bankers and increasing the volume of capital itself through the simple means of printing it, and at the same time has been euthanasing rentiers with zero interest rates, in the hope that borrowers might take the hint and borrow again.

Output and employment are rising in the US, but prices are not. The December CPI, out on Friday, fell 0.4 per cent on top of a 0.3 per cent fall in November, and that was only partly caused by falling energy prices.

With its own prices falling, the ECB is now going to try what’s not working the US -- to forget moral hazard and simply give money to those who wasted it. In America’s case it was Wall Street, in Europe it was both the bankers and the nations they lent to: Italy, Spain, Greece and France.

So, on Thursday, the ECB will almost certainly announce that it will take a few trillion euros worth of their mistakes on its own balance sheet, and don’t do it again please. The Germans have been fighting this idea tooth and nail, but have had to give up. If not, the markets will crash.

Switzerland is now the last anti-Keynes bastion. Its exporters will be road kill from the euro’s devaluation lorry and an economy that has had virtually zero unemployment and one of the highest standards of living in the world, may be wrecked.

That’s modern capitalism for you.

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