Mario Draghi Reprises Hank Paulson: Demands Full Monetization Authority Or Else Threatens With End Of Euro + Did The Great Financial Crisis Start With The End Of The Gold Standard? - Tyler Durden

Submitted by Tyler Durden: Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."

Bloomberg continues: "We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.” The reason he added the last part is because as Asmussen has hinted, the ECB believes it is in its mandate to do everything, including monetize whatever it needs, to prevent the market from dumping bonds. Of course, the reality is that Draghi has cause and effect completely inverse, and the only reason the EUR is plunging, as are peripheral bonds is because the local governments are doing nothing to fix their miserable fiscal reality, and will continue to do so as long as the ECB continues to intervene and give the impression that things are better than they really are.

But the worst news, is that the European Central Jawboner no longer seems to have any impact, and while the EURUSD did spike yesterday on these news, only  to retrace all gains, today's rehash of the same comments resulted in a brief 30 pips spike in the EURUSD, only for the entire move to be undone in under 10 minutes.


Which means only one thing: the market, as well as everyone else, is getting sick and tired of mere talking, promises and jawboninb, and now demands action. Which, however, is the worst possible thing for the central planners, as once again, their faulty theory will be exposed for everyone in practice: one can promise the moon, but when it comes time to deliver, not even the world's greatest central planners can do much if anything.
More from Bloomberg:

Draghi’s plan involves the ECB buying bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market, which would require them to sign up to conditions. Neither Spain nor Italy has made such a request yet.

The ECB sent proposals for the plan to national central banks today ahead of the Sept. 6 policy meeting. Germany’s Bundesbank opposes the ECB purchasing government bonds, saying it is too close to state financing for its comfort.

Draghi said the ECB’s interventions will not amount to monetary state financing as long as it purchases short-dated bonds.

“If we are to buy long-term bonds we are in a very delicate situation,” he told the lawmakers. “But if we go on the short-term part of the market where bonds have a length of time, a maturity of up to one year, two years or even three years, these bonds will easily expire, so there is very little monetary financing if anything at all that we are doing.”

Conditionality
While many countries have made “substantial progress” recently, “we can’t exclude that at some point in time this progress can easily stop because of adjustment fatigue,” Draghi said. “So that’s why we are asking for conditionality combined with these interventions by the ECB. I think this could stand against the charges that we are doing monetary financing, because we are not doing it.”

Draghi started his testimony yesterday with an overview of the economic outlook.

He said financial-market sentiment “has somewhat calmed down over the past few weeks.” Still, the situation “remains fragile and it’s surrounded by heightened uncertainty,” he said. “Looking ahead we continue to expect only a gradual recovery with subdued momentum and risks on the downside.”

Draghi said risks to the inflation outlook “are still broadly balanced, but certainly further intensification of financial-market tensions has the potential to affect the balance of risks for both growth and inflation towards the downside.”

Lending to households and private sector companies is “still very, very sluggish,” he said.

Asset Classes

Draghi said the debt crisis has distorted yields across a range of asset classes.

“Markets have perceptions of a certain country in a crisis,” he said. “Therefore they ask for higher interest rates in order to buy the bonds issued by the country. And when I say bonds I don’t only mean government bonds. Bank bonds, corporate bonds. Markets are asking for higher and higher interest rates, which in return reinforce the situation of the perception of the crisis. That’s where the main justification to step in is for the ECB and start buying bonds.”

The fact that the ECB’s monetary policy is only being transmitted in one or two euro nations compels the ECB to intervene, Draghi said.

“We have to rebuild the euro area,” he said. “We have to overcome this fragmentation exactly for pursuing price stability through changes in interest rates.”

Source 


Additional:
Did The Great Financial Crisis Start With The End Of The Gold Standard?

Submitted by Tyler Durden: It’s perhaps no co-incidence that the trend towards persistent deficits started around the final collapse of the last link to a quasi-Gold standard back in August 1971. As Deutsche Bank's Jim Reid notes, in a world of the Gold Standard or equivalent, those countries loosening policy too much would have seen a rush to convert their currencies into Gold thus destabilising their economic policy framework. Multi-year (let alone multi-decade) deficits and the GFC could not have occurred under a gold standard. So with the shackles off and with nothing backing paper money, the post 1971 period has seen a uniquely long period of fiat currencies globally with a beggar-thy-neighbour rolling period of credit creation. Never before in observable history have so many countries been off a precious metal type currency system for so long. This move in 1971 helped create the conditions (alongside ever looser financial regulation) for almost unlimited credit and debt creation potential that would have been inconceivable through the annuls of economic history. The developed world in particular went on a 36 year credit/debt binge which probably lasted longer and was more aggressive than it would have been had it not been for China's globalisation moment 30 years ago. From this point they almost single handedly started a three decade period of suppressing global inflation thus allowing the credit/debt binge to become ever bigger without the inflationary check that would have likely otherwise occurred.

It’s worth reminding ourselves that this graph is compiled on a log scale which can visually understate the scale of the loss of purchasing power seen against Gold over the last century. Such losses did occur in stages though.

As can be seen from the graph, the 1930s Depressionary period, and the war-torn 1940s, saw sizeable devaluations against Gold from most countries as many re-valued or left the Gold Standard due to high economic stress. Post WWII, the Bretton Woods system then broadly stabilised currencies by creating a Dollar standard where the US agreed to convert Dollars into Gold at around $35 per ounce. After 20 plus years of relative currency stability (helped by heavy post WWII capital controls), the late 1960s started to see pressures building on this Dollar/Gold peg as some countries chose to switch their Dollars into Gold as concern mounted about the loosening of US monetary policy and on the other side some countries had to devalue within the system.
By 1971 President Nixon had decided that this peg was unsustainable and on 15th August he suspended convertibility - which leads to the inflationary debacle in our previous post.

So after 41 years of
global fiat currencies and an unparalleled amount of debt that is
proving very difficult to shift, we really are venturing into the
unknown.

Source 

banzai7