Travel Log : Back to '75 - Any excuse is...
...a good excuse. Being on a lazy vacation, I picked up the following story with some delay. We touched upon it briefly during the blog debate of the previous posting but I think it's worth to go into a little bit deeper with the necessary pepper and salt. So the media have discovered that the Bundesbank is no sacred virgin and certainly not the pope of all central banks. Why ? Because way back in 1975, they performed their own private quantitative easing experiment, just like the FED, the BoJ, the BoE and the Chinese are doing right now. And then of course the question arises : Isn't it a little bit hypocrite of the Buba right now to make such a fuzz about the ECB wanting to embark on the same kind of policy ?
Well yes and no is my answer, always safe, but attack me on this after I finished my little story. Strictly speaking observers right now have a point. But we first have to go back to 1975 to see what was going on. In 1975, we entered stagflation with a negative supply shock caused by commodities, more precisely oil which was much more important in those days for business cycle reasons than it is right now. It was the first time that policy makers in the post war golden era were confronted with rising prices and rising unemployment, something which was not supposed to happen when using traditional Keynesian models. Interest rates in those days were also on the rise and the Bundesbank - under a Klasen/Schlesinger leadership - embarked upon QE worth 1% of German GDP. There are 2 remarkable features related to this story. First of all, it was explained as a mis-communication, a so-called slip of the tongue. And then of course with the pre-announcement of QE, they simply had to execute the initiative. Now I for one don't buy these kind of stories, this was intentional and from out of a 1975 perspective fully understandable : we don't know how to cope with the current crisis situation so let's try something unconventional. And so they did - probably also under some political pressure from the SPD Schmit government in those days - in order to lower interest rates and kick start credit demand. Unfortunately the wrong remedy for business cycle reasons because the root of the problem was elsewhere (supply side, not demand). As is the case right now by the way : private sector credit demand- today the consumer - has been overstretched and lowering interest rates is just a step into the Keynesian liquidity trap with more negative side effects than beneficial ones in the short term (remuneration of savings to name one).
And you could also read this one between the lines when the official justification was made public :
....“we can only operate open market policy in order to regulate the money market, but not to finance the public deficit”. So in other words, the Bundesbank needed to purchase bonds in order to maintain monetary policy’s transmission channel. The Bundesbank had set a monetary growth target for the year for the first time, which it risked missing (money growth slowed to 5.7% in May 1975, below the target for the year of 8%).
And Mario Draghi apparently is using the same line of thinking. In his 2 August statement, he referred to the same problems of the monetary transmission break-down in order to justify future QE efforts:
"Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy."
So QE is put on the table for reasons of monetary transmission problems, way back in 1975, in the US and Japan over the past couple of years and now in Europe. Is it the right argument ? Probably not, in the best case scenario very partially. Does it matter ? Probably not, because in the perception of our monetary and political leaders other higher interests are at stake, both political and from a global banking sector nature. And history will tell us if they have a point in buying precious time with this move and at the same time putting the Germans "off side".
For those who know me by now and in view of the silly lazy season, any excuse is a good excuse to play some music. The seventies are glam rock, punk, ska/reggae, Led Zeppelin, Ziggy stardust, Velvet Underground, Synthesizers, symphonic bombastic rock (Queen, Genesis etc), Joy Division. But the seventies are also fun, the "wrong music" we apparently like many years after the facts. For me top of the bill are KC & the Sunshine Band (the real Miami Sound Machine), the Tramps, Barry White & the Love Unlimited Orchestra, all the episodes of Soul Train, Chic & Nile Rodgers, blow section bands. But since it's 1975, my choice has been restricted. For some peculiar reason, I consider "Griechischer Wein" from Udo Jurgens not appropriate. So we leave you with the following no1 hits. Van McCoy and "Do the Hustle" ("do it, just do it !"), also because of the trumpet section. And to conclude the jazzy funky "Pick up the Pieces", originally from the Irish Average White Band. But today, I think we should let Candy Dulfer having a go at blowing that funky horn.