Mario Draghi, head of the European Central Bank, must be thinking that one can’t get anything for 2.6 trillion euro, nowadays! This astounding amount is the ECB’s QE or, in other words, all the bonds it has bought since March 2015 – with a printing press: The ECB didn’t sell any assets of equivalent value and it didn’t borrow any money to do so. It has created money out of thin air, by mere accounting entries, in order to acquire sovereign and corporate Euro zone bonds. This “divine” power of central banks often ends with a destructive wave of inflation (Zimbabwe, Venezuela, Germany in 1923, etc.). 

This “quantitative easing”, the technical term for the printing press – a little too vulgar because everyone knows what it means – started in March, 2015, with 80 billion euro a month, 60 billion after April, 2017, 30 billion after January, 2018, and then 15 billion since October and until December, for a total of 2.6 trillion euro. So will it all be ended in January? Well, not really, because when the bonds mature, the ECB will reinvest the whole of the money into other bonds, and that will represent 200 billion euro for 2019, for an average of 16 billion a month, about the same level as the last QE. One must not starve the markets and the banks too quickly! 

What was the objective of that gigantic QE? The goal was to fight a deflation that Mario Draghi was seeing coming and that had to be considered as an absolute catastrophe (actually, for the over-indebted States, not for the consumers) and, at the same time, support the economy by lowering interest rates. Those massive purchases did provoke lower interest rates, even negative ones for a time, which were supposed to facilitate credit and, thus, reboot the economy... But we haven’t seen a lot, actually. One doesn’t get richer by printing money! And worse, artificially low interest rates create false prices in the whole economy. In fact, the real reason was and remains supporting the European banking sector, ill and fragile, with a leverage of 1/30 (1 euro in cash for 30 euro in liabilities), thus being entirely dependent on liquidity from the ECB. On top of that, European banks also rely on other programs from the monetary institute, such as long-term refinancing operations (LTROs), notably. 

Some media continue writing that “the ECB is reducing its support for the economy”, which shows a total misunderstanding of reality, but let’s leave it at that. Mario Draghi just got a reprieve for the European banking system... until the end of his mandate, in October, 2019. His successor will have to deal with an ECB that has become an enormous hedge fund, and a banking system that will not have solved its basic problems... Let’s wish it a lot of courage. 

So, what did not work when the ECB was created in 1998? Our takeaway on that: It’s not the central banks that should be independent (because if they’re allowed to do whatever they want, like the ECB, we’re all going to lose), but rather it’s the money that should be independent, neutral, without ever the need of the printing press, and the central bank should be there to guarantee just that. It may be too late to rewind the movie...

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