The ECB is crossing the Rubicon - "Alea jacta est"




Will the ECB be able to maintain its financial orthodoxy for a long time to come? That is a legitimate question. Central banks seem to want to go ever further in creativity to support wobbly economies. The technique is simple: it is called "asset buyback (asset purchase)." But what assets will you tell me? That's where creativity comes in. There is no longer boundaries. Jerome Powell, the boss of the Fed, as well as Christine Lagarde, the president of the ECB, through their institutions are launching billions plans every day. For example, the Fed will buy back corporate bonds deemed risky and securities that have recently been rated "BBB-" but have fallen into the "rotten bond" category (i.e. "junk bond"). To argue that good companies were nonsense because those in need of help are in principle the weakest, right? Jerome Powell is Mr. "We are doing all we can" and Christine Lagarde Madame "whatever it takes" (which she took over from “Super Mario” Draghi). The ECB, for example, buys commercial paper issued by companies, to also sustain MMF’s. Monetary taboos and sacrosanct economic principles are flying apart. The danger comes from the States which will be over-indebted for the next ten years. Financial orthodoxy is not just exploding at the ECB, but at every national level too.



The next step will probably be the repurchase of shares (i.e. listed equities), as does the Bank of Japan or the Swiss bank to diversify their reserves. The FED and BCE never crossed the Rubicon. She won't be able to turn back the clock. Studies would tend to show that share purchases via ETF's have a positive effect on the economy and of course the price of shares. Oli Rehn, former European Commissioner during former GFC and president of the Bank of Finland, supports this idea. They would contribute to the wealth of individuals and families holding shares and thus support the economy through consumption. That would be the so-called "wealth effect." Be careful, however, not to exaggerate because the excess harms everything. To return to Japan, the Japanese central bank is the largest holder of shares in its country. It is not very healthy and sustainable in the long run. Speculative bubbles should not be created, as with bond purchase. So, let us accept that the next step is written, and that Christine Lagarde will sooner or later cross the Rubicon. So soon the dice will be thrown away. Survival is priceless.

François Masquelier - ATEL