Sterilization - The latest pile of economics rubbish

Justin1982

In fairness, this is complete economic rubbish. "Sterilization" - Pumping money into the European system via buying sovereign debt and then trying to take it out again via a different method.

http://www.huffingtonpost.com/michael-pento/counterfeiting-cruises-to_b_1876896.html

As someone who works in the financial industry, having come from a different discipline altogether as a student in maths/physics, I'm amazed at the complete rubbish that is being financially engineered by economists and bankers.

Coming from a scientific background and slowly learning how the financial world works over the last few years, it seems like economists and bankers are intent on financial suicide.

ECB, FED, Banking and World Government economic policies, appear to me to be analogous to the semi hypothetical situation where third rate biologists try to engineer viruses which they carelessly release on the public in the hope that these viruses eat other harmful viruses that they earlier engineered and released and soon enough the viruses just start killing large swaths of society.

I mean like do economists not realize that they cant engineer their way out of an economic mess? They are only putting off the inevitable for a few more years.

[Jackass]

Well, there's a whole philosophical debate you could have about that, considering finance as we know it now a days is purely theory in the first place and not secured on gold standard as it originated.

Then you've got the epic fractional reserve lending debate about money that does not exist constantly being created and what value loan books are actually based on.

I do agree however that the current fiscal planning globally seems to be very circular and kicking the can down the road, but I wouldn't profess to being an expert or understanding everything in its entirety, but as a student of Economics, it's incredibly interesting to learn about the more in depth intrinsic theory behind it, but as it stands, I can't suggest an alternative to what is happening. Not until (if ever) I can get my head around all of it!

andrew

People have been predicting that there'd be crazy inflation for the last 4 years, and it hasn't happened. Yield curves show that nobody thinks there's going to be any crazy inflation, and central banks have a tried and tested way of controlling inflation. So what's the problem?

Justin1982

Personally I think the economic crisis since 2007 which still hasnt been resolved is the main problem.

And there is a complete over manipulation of the financial markets by the FED and the ECB.

Capitalism and the economics that go with it should be simple. Its being completely over complicated.

ECB purchasing european sovereign debt is just such a bad idea!
They have to purchase ridiculous amounts of bonds on the secondary market just to get the interest rates to lower even slightly. The benefits of which are minor and generally short lived. The speculators just sit on the side line laughing, happy in the knowledge that the underlying problems of the sovereign EU states either stay the same or get worse so the bond yields are still going to go up.

And then they have some ridiculous rule that its not ok for the ECB to purchase Sovereign debt directly from Sovereign but its ok to purchase indirectly on the secondary market. If they think its a bad idea to buy directly then why do they think its a good idea to buy on the secondary market?

When the Irish government guaranteed the banks a few years ago, I supported them whole heartedly. I was somehow convinced that they knew what they were doing and had actually done the maths and knew their numbers. As we all know now, they knew nothing. It was just a huge gamble made by a bunch of morons who were basically trying to cover their own asses.

I look at the ECB strategy the last few years and I see more of the same. At this stage they are pulling money out of their asses and plugging holes with it in a rushed manner as they jump from one crisis to another. Thats not how a real functioning economy is meant to work. ECBonomics is like a game of hammer the gopher. Hit one gopher and another one pops up somewhere else.

andrew

Justin1982 wrote: »

Personally I think the economic crisis since 2007 which still hasnt been resolved is the main problem.

And there is a complete over manipulation of the financial markets by the FED and the ECB.

Capitalism and the economics that go with it should be simple. Its being completely over complicated.

ECB purchasing european sovereign debt is just such a bad idea!
They have to purchase ridiculous amounts of bonds on the secondary market just to get the interest rates to lower even slightly. The benefits of which are minor and generally short lived. The speculators just sit on the side line laughing, happy in the knowledge that the underlying problems of the sovereign EU states either stay the same or get worse so the bond yields are still going to go up.

And then they have some ridiculous rule that its not ok for the ECB to purchase Sovereign debt directly from Sovereign but its ok to purchase indirectly on the secondary market. If they think its a bad idea to buy directly then why do they think its a good idea to buy on the secondary market?

When the Irish government guaranteed the banks a few years ago, I supported them whole heartedly. I was somehow convinced that they knew what they were doing and had actually done the maths and knew their numbers. As we all know now, they knew nothing. It was just a huge gamble made by a bunch of morons who were basically trying to cover their own asses.

I look at the ECB strategy the last few years and I see more of the same. At this stage they are pulling money out of their asses and plugging holes with it in a rushed manner as they jump from one crisis to another. Thats not how a real functioning economy is meant to work. ECBonomics is like a game of hammer the gopher. Hit one gopher and another one pops up somewhere else.

But ECB policy so far seems to have been able to drive down bond yields, to a limited extent. And Why is the ECB promising to purchase soverign debt a bad idea? I can see where you're coming from, in that it seems very rushed. But the problem is that the economy isn't functioning at the moment, and so calls for actions that that are unusual and ad-hoc.

Justin1982

andrew wrote: »

But ECB policy so far seems to have been able to drive down bond yields, to a limited extent. And Why is the ECB promising to purchase soverign debt a bad idea? I can see where you're coming from, in that it seems very rushed. But the problem is that the economy isn't functioning at the moment, and so calls for actions that that are unusual and ad-hoc.

Driven down bond yields on Irish bonds by what? Approximately 1 percent?
Thats monkey nuts. Bond yields coming down due to "real" investors buying Irish debt would be fine. But thats not really the case. I'd suggest that Bond yields come down mainly when ECB buy large amounts on the secondary market. I dont have the figures to back up my claims and they are probably hard if not impossible to find. So the Sovereign debt market in Europe is not really much of a market at all. Its being manipulated by ECB to make it look like things are improving.

The other problem as I said before is that it takes ridiculous amounts of debt buying by the ECB to make any sort of a positive dint in yields on Sovereign debt. As in ECB spends billions buying Sov debt. Bond yields probably only come down by 0.1% as a result for example, saving Ireland a couple of million in interest on bonds then bought in the primary market. Thats the whole point of the bond buying programme. How can spending ridiculous sums of money just to save a tiny amount of money really be justified?

And there is **** all chance of ECB being able to re-sell all these bonds any time soon. If they try to then they risk driving bond yields back up.

Also as ECB artificially drives bond yields down then the pressure comes off the Sovereigns themselves to actually implement real economic changes required to really return confidence to real investors so they will buy Sovereign debt.

And there is no such thing as a free meal! ECB needs to get the money from somewhere so they can buy all the Sovereign debt. Currently they can either get it from Germany (morons for giving it to them) or they can print the money. Printing money, no matter how they try to "steralize" it, will drive up inflation and cause problems in other areas of the economy.

And finally, as ECB piss about buying sovereign debt, the total debt in Europe increases and increases to really dangerous levels. And the ECB's actions are only multiplying the amount of debt in Europe overall.

Capitalism needs to be run as it was designed. Gambling style bailouts should have no part to play in real economics.

andrew

Justin1982 wrote: »

Driven down bond yields on Irish bonds by what? Approximately 1 percent?
Thats monkey nuts. Bond yields coming down due to "real" investors buying Irish debt would be fine. But thats not really the case. I'd suggest that Bond yields come down mainly when ECB buy large amounts on the secondary market. I dont have the figures to back up my claims and they are probably hard if not impossible to find. So the Sovereign debt market in Europe is not really much of a market at all. Its being manipulated by ECB to make it look like things are improving.

Every time the ECB has spoken about action which might alleviate the Irish debt burden or improve Irish economic growth, bond yields fall. They havn't fallen ~4% in the last year on their own, and that was without bond buying AFAIK.

The other problem as I said before is that it takes ridiculous amounts of debt buying by the ECB to make any sort of a positive dint in yields on Sovereign debt. As in ECB spends billions buying Sov debt. Bond yields probably only come down by 0.1% as a result for example, saving Ireland a couple of million in interest on bonds then bought in the primary market. Thats the whole point of the bond buying programme. How can spending ridiculous sums of money just to save a tiny amount of money really be justified?

And there is **** all chance of ECB being able to re-sell all these bonds any time soon. If they try to then they risk driving bond yields back up.

Also as ECB artificially drives bond yields down then the pressure comes off the Sovereigns themselves to actually implement real economic changes required to really return confidence to real investors so they will buy Sovereign debt.

And there is no such thing as a free meal! ECB needs to get the money from somewhere so they can buy all the Sovereign debt. Currently they can either get it from Germany (morons for giving it to them) or they can print the money. Printing money, no matter how they try to "steralize" it, will drive up inflation and cause problems in other areas of the economy.

And finally, as ECB piss about buying sovereign debt, the total debt in Europe increases and increases to really dangerous levels. And the ECB's actions are only multiplying the amount of debt in Europe overall.

Capitalism needs to be run as it was designed. Gambling style bailouts should have no part to play in real economics.

The thing about ECB bond buying, is that they don't have to buy all the bonds they say they'll buy. They just have to promise to do it. Once that guarantee is there, it becomes a self fulfilling prophecy, and risk premia fall. And they don't fall 'artificially' they fall because the risk premia associated with a sovereign falls when that sovereign has access to a lender of last resort.

Justin, may I ask what area of finance you work in?

noodler

Its difficult to nail down exactly why you have a problem with X,Y and Z Justin.

However, I would like to say that the latest deal has had a positive effect on yields for the concerned countries. Obviously, previous bond purchases have also been positive but short-lived as you say.

What has, in my opinion, been missing from the previous programme (the SMP) was that it was too limited. I think (although I could be wrong and If I could predict this stuff I'd make money out of it) that the 'unlimited' aspect of this plan (OMTs) is what will make it effective.

Spanish yields are starting to creep back up I see but once they eventually enter a programme (or the precautionary 'diet programme') then in theory speculation (even if thats a bit of a misnomer imo since we are generally talking about pension funds rather than monsters) should desist because holders of Spanish debt know the value of their coupons will be maintained via ECB intervention.

Just noticed there that our yields (9 year) have stayed at 5.3% whilst the Spanish ones have headed back up to 6%.

Justin1982

andrew wrote: »

Every time the ECB has spoken about action which might alleviate the Irish debt burden or improve Irish economic growth, bond yields fall. They havn't fallen ~4% in the last year on their own, and that was without bond buying AFAIK.

The thing about ECB bond buying, is that they don't have to buy all the bonds they say they'll buy. They just have to promise to do it. Once that guarantee is there, it becomes a self fulfilling prophecy, and risk premia fall. And they don't fall 'artificially' they fall because the risk premia associated with a sovereign falls when that sovereign has access to a lender of last resort.

Ok in fairness Ireland is a bad example. As in Ireland has largely taken relevant steps to keep the wolf from the door and if the rest of Europe gets its act together then I wouldnt bet on Ireland getting out of its tangle. But to actually get out of this tangle, how much money has been pumped into Irish banks and how much sovereign debt has been built up? My figures probably are not completely correct but I think I remember reading that ECB had to fill 160 Billion euro funding hole in Irish banks when the ECB shouldnt really be funding Irish banks in a real functioning economy. And Irish debt is currently 133 Billion compared to a tax take of < 40 Billion which is used to service it. Not sure if Irish debt even includes the bailout from Europe. And thats just the Irish cost. And its a huge huge risk hanging over around our necks. I mean like how the hell do we get out of another economic mess if another independent financial crisis popps up in 5 years time or even in 10 years time? I'd like to see ECB financially engineer its way out of that.
Look at Spain, Portugal, Italy and then basket case Greece currently.
I'd really love to be optimistic about Europes future but I'm far from convinced that the PIGS will follow Irelands lead and take the required pain and get themselves sorted rather than go the way of Greece.

Deleted User wrote: »

Justin, may I ask what area of finance you work in?

I work in Hedge funds for a number of years now. Largely looking at Swaps market at the moment and in particular CDS's. Wouldnt like to overstate my expertese in the area though as I'm not classically trained in Economics. I only know what I've learned as I go along.

noodler wrote: »

Its difficult to nail down exactly why you have a problem with X,Y and Z Justin.

However, I would like to say that the latest deal has had a positive effect on yields for the concerned countries. Obviously, previous bond purchases have also been positive but short-lived as you say.

What has, in my opinion, been missing from the previous programme (the SMP) was that it was too limited. I think (although I could be wrong and If I could predict this stuff I'd make money out of it) that the 'unlimited' aspect of this plan (OMTs) is what will make it effective.

Spanish yields are starting to creep back up I see but once they eventually enter a programme (or the precautionary 'diet programme') then in theory speculation (even if thats a bit of a misnomer imo since we are generally talking about pension funds rather than monsters) should desist because holders of Spanish debt know the value of their coupons will be maintained via ECB intervention.

Just noticed there that our yields (9 year) have stayed at 5.3% whilst the Spanish ones have headed back up to 6%.

My main point is ECB is trying to financially engineer itself out of an almost terminal financial crisis and I'm just questioning how wise some or nearly all of their recent steps have been. Really seems like the act of a desperate gambling man trying to win back his fortune.
I read one line a few months ago from Constantin Gurdgiev in his blog. It went something like this "The ECB has a number of large weapons at its disposal which they can and will use to patch over the problems in European economy and they can keep Europe from falling over the precipice for a very long time using these weapons". I think Constantin's point was that these weapons basically involved heaping more and more debt on European Sovereigns and at some point the debt was going to be too much. I dont agree with everything Constantin says or pay a whole lot of attention to these celebrity economists. But in this instance he had a point. Europe is trying to solve its problems via various methods which all essentially increase the debt level of europe to very dangerous levels.

As a pointer, look at the amount of the SMP or OMT purchases that have taken place over the last couple of months. Now look at 10yr spread (GOVI on the bloomie) for Ireland and tell me that ECB policy isn't working.

I wouldn't be too worried about what Constantin says. He'd turn a wedding into a wake with little effort.

Keep in mind as well that this is a general equilibrium problem - follow the flow of funds and don't look at any particular deal in total isolation.

Justin1982

Deleted User wrote: »

As a pointer, look at the amount of the SMP or OMT purchases that have taken place over the last couple of months. Now look at 10yr spread (GOVI on the bloomie) for Ireland and tell me that ECB policy isn't working.

I wouldn't be too worried about what Constantin says. He'd turn a wedding into a wake with little effort.

Keep in mind as well that this is a general equilibrium problem - follow the flow of funds and don't look at any particular deal in total isolation.

I think I've agreed that Ireland are somewhat on the road to recovery if all goes to the optimistic ECB and Irish Government plan. My point is that the cost of this recovery is a tad on the high side. As I said, ECB is bearing the cost of irish bank funding to the tune of how much? Big moolah. How much is the bank bailout costing ECB and Irish tax payer? Big moolah. And how much is the Sovereign bailout? Big moolah again.
So there is a huge debt burden on Ireland and the debt burden is not that far off crippling the economy. Consider another financial crisis somewhere down the line in the next few years. What would the consequences on the Irish economy be?
This economic crisis was fuelled by countries allowing huge debt to be built up by the Sovereign and by large tracts of society itself. The solution to the debt problem is allow the european Sovereigns build huge dangerous levels of debt which Europe will struggle to pay off. Already its been admitted that Greece cant pay off its debts. And I worry about Spain, Italy and Portugals ability to pay it off as well even in a best case scenario.
As far as I'm concerned bond yields are over played and analyzed too much. The bond market is being manipulated by the ECB and I'm not sure its overly transparent how to what extent they are manipulating bond yields to look better than they really are.
If bond yields on sovereign debt are going down significantly while at the same time Sovereign debts are increasing to dangerous levels then I dont think that one needs to be a trained economist to arrive at the conclusion that the bond yield market is either A. Retarded or B. Overly manipulated by the ECB.

You are conflating two issues here.

We have debt associated with the banking crises, c. €40bn of such (Anglo&Permo, AIB and BOI). Currently, this is being financed by a prom note that is getting liquidity from the ECB. However, the general view (including that of your industry) is that this will become an EU problem, so you can view that is EU debt that is parked (temporarily) on the Irish balance sheet. We'll see how this works out over the next couple of months.
Keep in mind also, that the ECB is the lender of last resort - it is the role of the central bank to backstop viable banks. (In my view, ANGL wasn't viable, but the others were but I wasn't the FinMin at the relevant period).

The other issue is that Ireland is running a structural fiscal deficit (€12bn p/a I believe). This is the key issue for us, we spend more then we earn. This is why we need a government with a pair of balls to actually tackle reductions in public spending.
Currently, we are getting support on this issue from the ECB via the old SMP / new OMT program which aims to bring our yields back into line with market reality, but in order to return to the market long term we must start to run (or approach) a balanced budget. This is what we should be protesting about as without this, we will be a persistent ward of the EU/IMF.