The Big Easing

BRUSSELS – More than three years after the financial crisis that erupted in 2008, who is doing more to bring about economic recovery, Europe or the United States? The US Federal Reserve has completed two rounds of so-calledquantitative easing,” whereas the European Central Bank has fired two shots from its big gun, the so-called long-term refinancing operation (LTRO), providing more than €1 trillion ($1.3 trillion) in low-cost financing to eurozone banks for three years.

For some time, it was argued that the Fed had done more to stimulate the economy, because, using 2007 as the benchmark, it had expanded its balance sheet proportionally more than the ECB had done. But the ECB has now caught up. Its balance sheet amounts to roughly €2.8 trillion, or close to 30% of eurozone GDP, compared to the Fed’s balance sheet of roughly 20% of US GDP.

But there is a qualitative difference between the two that is more important than balance-sheet size: the Fed buys almost exclusively risk-free assets (like US government bonds), whereas the ECB has bought (much smaller quantities of) risky assets, for which the market was drying up. Moreover, the Fed lends very little to banks, whereas the ECB has lent massive amounts to weak banks (which could not obtain funding from the market). In short, quantitative easing is not the same thing as credit easing.

The theory behind quantitative easing is that the central bank can lower long-term interest rates if it buys large amounts of longer-term government bonds with the deposits that it receives from banks. By contrast, the ECB’s credit easing is motivated by a practical concern: banks from some parts of the eurozone namely, from the distressed countries on its periphery – have been effectively cut off from the inter-bank market.

A simple way to evaluate the difference between the approaches of the world’s two biggest central banks is to evaluate the risks that they are taking on.

When the Fed buys US government bonds, it does not incur any credit risk, but it is assuming interest-rate risk. The Fed acts like a typical bank engaging in what is calledmaturity transformation”: it uses short-term deposits to finance the acquisition of long-term securities. With short-term deposit rates close to zero and long-term rates at around 2% the Fed is earning a nicecarry,” equal to about 2% per year on bond purchases totaling roughly $1.5 trillion over the course of its quantitative easing, or about $30 billion.

Any commercial bank contemplating a similar operation would have to take into account the risk that its cost of funds increases above the 2% yield that it earns on its assets. The Fed can determine its own cost of funds, because it can determine short-term interest rates. But the fact that it would inflict losses on itself by increasing rates is likely to reduce its room for maneuver. Its recent announcement that it will keep interests low for an extended period thus might have been motivated by more than concern about a sluggish recovery.

By contrast, the ECB does not assume any maturity risk with its LTRO, because it has explicitly stated that it will charge banks the average of the interest rates that will materialize over the next three years. It does, however, take on credit risk, because is lending to banks that cannot obtain funding anywhere else.

The large increase in the ECB’s balance sheet has led to concern that its LTRO might be stoking inflation. But this is not the case: the ECB has not expanded its net lending to the eurozone banking system, because the deposits that it receives from banks (about €1 trillion) are almost as large as the amounts that it lends (€1.15 trillion). This implies that there is no inflationary danger, because the ECB is not creating any substantial new purchasing power for the banking system as a whole.

The banks that are parking their money at the ECB (receiving only 0.25% interest) are clearly not the same ones that are taking out three-year loans at 1%. The deposits come largely from northern European banks (mainly German and Dutch), and LTRO loans go largely to banks in southern Europe (mainly Italy and Spain). In other words, the ECB has become the central counterparty to a banking system that is de facto segmented along national lines.

The real problem for the ECB is that it is not properly insured against the credit risk that it is taking on. The 0.75% spread between deposit and lending rates (yielding €7.5 billion per year) does not provide much of a cushion against the losses that are looming in Greece, where the ECB has €130 billion at stake.

The ECB had to act when the eurozone’s financial system was close to collapse at the end of last year. But its room for maneuver is even more restricted than that of the Fed. Its balance sheet is now saddled with huge credit risks over which it has very little control. It can only hope that politicians deliver the adjustments in southern Europe that would allow the LTRO’s recipient banks to survive.

Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.


Updated April 8, 2012, 6:39 p.m. ET

Who Deserves Credit for the Improving Economy?

American households are proving to be more prudent than their government.


Three years after a severe recession, the economy remains stuck in a modest recovery. More than 12 million Americans actively seek work. Many citizens, particularly the younger and less-educated, find themselves detached, demoralized and defeated. Many others, gainfully employed with some trappings of success, question whether the promise of America will endure for the next generation.


And still, a growing Washington consensus credits any improvement in economic performance to Washington's doing. Private markets are incapable of generating self-sustaining, rising living standards, so businesses and households should be grateful for the government's continued largess. This consensus seems to believe that the strength of our country rests with its political leaders. Our leaders' strength is their intellect. And the success of the governed depends principally on the enlightened decisions of those who govern.


My views are decidedly less fashionable: The strength of our country is our economy. The strength of our economy is our citizenry. And the strength of our citizens is their character and good judgment.


Short shrift should not be given to those on the front lines of the real economy. Workers and firms are owed overwhelming credit for the economy's recent performance. The flexibility of our labor, product and service markets has sustained us through the toughest of times and provided the best opportunity for our economy to prosper.


A full accounting of government activism can ill afford to dismiss the substantial risks incurred. Proponents of still more fiscal expenditures and more aggressive monetary policy emphasize the immediate benefits. But our country's finances are unsustainable. The rule of diminishing marginal returns applies to policy activism. There will be a bill to pay. If policy makers have learned anything in the last few years, they should understand this: Complacency breeds crisis.


The medium-term prospects of households and businesses are not significantly affected by fleeting changes in fiscal policy. Families and businesses cash their "stimulus" checks and pocket one-time incentives, but a strong foundation for future growth demands balance-sheet repair. So middle-income families have made tough choices and deferred some consumption. They deserve our encouragement. Instead, government seems keen to tempt them to reacquire old, bad habitsborrow, consume and hope it all works out.

The "fiscal cliff" in early 2013—when government stimulus spending and tax relief are set to fall—is not misfortune. It is the inevitable result of policies that kick the can down the road. Fortunately, American households are proving more prudent than their government.

.U.S. firms—as measured by earnings, profit margins, strength of balance sheet—are also systematically outperforming expectations and foreign peers. This is not due to a government mandate. When the economic environment deteriorated, U.S. companies reacted with force and purpose to cut costs and drive productivity. Because they prioritized, they are now poised to attract capital and grow.

Policy makers should resist the tendency to justify their success using static econometric models. We should be wary of practices that assign higher fiscal multipliers to government spending than to private activity and then audit the results using the same models to prove the success of their efforts. Economists should not put their pencils down after summing the arithmetic contribution of government spending to next quarter's GDP and declare victory.


Finally, we should not allow the failings of the U.S. banking system to serve as a generalized indictment of the market economy. The failures in the banking system owe at least as much to public-policy failures (Fannie Mae, Freddie Mac) as to deficient private practices (weak risk management). The marketplace is still the best allocator of capital and labor.

That doesn't mean that private markets for goods, services or financial products are always and everywhere perfect. But market failures are less prevalent than government failures. And government doling out capital to anointed firms and chosen sectors tends to lower returns and reduce standards of living over time.

This debate on the source of recovery may pose a Rorschach test of sorts. But we shouldn't choose sides as some article of faith. We should come to judgments based on facts and evidence. The burden of persuasion rests squarely on the shoulders of those who want to borrow more money from future taxpayers to fund a larger government today.


Mr. Warsh, a former Federal Reserve governor, is a lecturer at Stanford's Graduate School of Business and a distinguished visiting fellow at the Hoover Institution.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

The Importance of Selfishness
By Dean Henderson

April 9, 2012

(excerpted from The Grateful Unrich: Revolution in 50 Countries: Chapter 12: Zootown)

After a year traversing the planet and a few months of blue-collar reality working 80 hour weeks with a Pipefitters Union in Minneapolis, my plunge back into academia at the University of Montana in the fall of 1989 is reverse culture shock central.

I am a reader/grader for a Philosophy 200 Ethics class. The teacher is a wannabe aristocrat who plays violin in the city orchestra and worships Aristotle from the safety of his intellectual ivory tower.

My first tests come back and Aristotle tells me the kids are lazy and doomed to gas station employment, since they have forgotten the sacred commas and can’t spell teleology.

I tell him he is brainwashed and that modern Western culture is a product of centuries of dualistic and atomistic philosophies and their logical consequences.

The primary result has been a substantial devastation of the diversity of life which existed on this planet prior to the adoption of said worldview.

One of the most dangerous dualities which emerged is the notion that our self-interest is naturally at odds with altruistic behavior. I write a paper titled The Importance of Selfishness for a more radical sane professor named Tom Birch. The argument goes something like this:

Indigenous cultures hold a high regard for gift-giving. The Lakota Sioux have a giveaway ceremony.

The Athabaska conduct potlatches. In Ituri Pygmy society the hunter who makes the kill always eats last. In all hunting and gathering societies there is an understanding that giving is a means of gaining respect and is thus the ultimate act of selfishness.

In such a society one’s self-interest coincides with the interests of the tribe, destroying the dualistic Western notion of self which facilitated the rise of Homer and Aristotle and other purveyors of the merits of pirate capitalism.

This same metaphysical harmony exists in all the world’s major religions. Hindu doctrine espouses a circular notion of karma, whereby a person- through good deeds and purity of heart- accumulates nirvana or enlightenment. Nirvana ultimately translates into being reincarnated into a higher caste in one’s next life, so acquiring karma through giving is most definitely in one’s self-interest.

Tibetan Buddhism- along with its counterparts Taoism, Confucianism and Shintoism- goes even further down the road of selfishness.

The Dalai Lama teaches that compassion towards oneself is the primary component of compassion towards others and towards life in general- that self-interest is equal to the interest of the whole.

Early Christian sects believed that giving alms would result in eternal salvation and even the modern day passing of the tray at every Catholic Church in America symbolizes the notion that through giving one will attain Heaven.

Islamic and Jewish laws contain similar non-dualistic ideas on the subject. So what caused the emergence of this guilt and shame-ridden duality in Western scientific and cultural circles?

The reason probably has more to do with economics than it does with philosophical underpinnings or scientific consistency, though at some point the three have become inextricably linked. The market began dictating science and philosophy to perpetuate the consolidation of international monopoly capitalism.

It is instructive that when scientists cynically rail against the evils of human nature, while their philosopher cohorts chant down self-interest, both camps are quick to cite unjust economic schemes and relationships as their example.

Rarely do they mention that these schemes seem to be confined to modern Western capitalist societies, where a skewed framework based on duality encourages the split between self-interest and altruism. Nor do they broach the question of whether greed is, on a long-term basis, a truly selfish act or one of self-destruction.

Their self-censorship keeps them well-paid spokespersons for the oligarchy, which profits from this mockery of logic via its never-ending international shakedown cruise.

In indigenous cultures buying and selling occurred only at a local level. Economy was based on sharing, reciprocation and an egalitarian dispersal of resources. Those whose kindness was greatest were honored and respected leaders of their communities.

Since there was no perceived duality between the interest of oneself and the interests of the whole tribe, the village worldview remained un-fractured and intactreinforcing a loving, sharing viewpoint towards all living things, rather than one of violence and suppression which has accompanied the rise of industrial capitalism. When resources are derived at a local level it is obvious that any hoarding of goods results in the demise of both community and self.

Self-interest is furthered by a healthy respect for the ecosystem that sustains everyone. As commerce moved beyond a local level, it needed justification for the short term greed which propelled it outward.

Self-interest increasingly came to be viewed in terms of money and property, as a system of class sprang up.

Equality and sharing gave way to colonization of resources in far-away foreign lands and the exploitation of cheap labor through a rigged international monetary system. Western philosophies which promote dualism and atomism are merely myths which were fashioned to rationalize this colonization process.

Self-interest became associated with this cunning colonial approach to attaining wealth, probably so that potential competition could be intellectually snuffed out. This supposed self-interest is now played out daily on the world’s stock exchanges and in corporate boardrooms around the world.

As capitalism reaches its final phase and internationalizes further, one can expect even darker views of self-interest to emerge, foisting additional guilt and confusion upon an increasingly atomized and shattered people.

Self-destructive tendencies will become more prevalent as people become more alienated from the wholeness of self and from the planet, which operates on a basis of whole cycles.

Failure to recognize these delusions will result in an increased destruction of both the planet and its human inhabitants. Do we wish to survive as a species? Perhaps these deadly myths can only be destroyed if the economic structure which spawned them – namely monopoly capitalism – is destroyed.

I transfer into the more radical Environmental Studies (EVST) department and become involved with the local Earth First! Part of my attraction to Missoula had been an increasing belief that saving the environment was the most important thing I could do.

But the more time I spend with these people the more I realize that most of them have come from wealthy families and hold a general disdain for working class people.

These misanthropes rail against loggers, ranchers and RV owners; but when I name the corporations who are actually behind the environmental rape of Montana, they become deaf.

Their upper-class upbringings make it taboo to talk about class. They are tools of Rockefeller’szero population growthClub of Rome and the Rothschild-led banking cartel.

Dean Henderson is the author of Big Oil & Their Bankers in the Persian Gulf: Four Horsemen, Eight Families & Their Global Intelligence, Narcotics & Terror Network, The Grateful Unrich: Revolution in 50 Countries and Das Kartell der Federal Reserve.

Is the Correction Over?

By Jeff Clark, Senior Precious Metals Analyst

April 9, 2012 
Given last week's selloff in gold and silver, it's time to refresh our "corrections" chart and put the pullback in perspective. The drop in precious metals hasn't been fun for those who already own all the gold they want, but unless one thinks the bull market is over, it's important to end-game profitability to look at corrections as good buying points.

First, for those who've been rattled by this recent selloff, it's times like these when you have to examine the fundamental reasons why you own gold and silver in the first place. If you bought gold primarily as a speculation that would "only go up," I have some bad news: Your reason is weak, and you might get flushed out by one of these corrections before it's really time to exit.

Conversely, if you bought because you genuinely fear what is happening to the value of your currency, or the very real possibility of high inflation, or that global events will affect your personal standard of living, or because "real" interest rates provide a negative return, or you're tired of government meddling and mismanagement, then you understand what gold is really for and will see a temporary pullback for precisely what it is.

Just because the Federal Reserve's minutes stated last week that it is refraining from further "monetary accommodation" unless the economy sputters, that doesn't mean there won't be more money-printing - nor that the money already printed won't have any further effect. Economics 101 says you can't dilute the currency to the extent we have and not experience any negative repercussions. And with the amount of debt, deficit spending, and unfunded future liabilities that have to be dealt with, it's not difficult to see that inflation is the easiest way out for politicians. Until there is an abrupt shift in both fiscal and monetary policy, history tells us we should continue to purchase gold.

When precious-metals prices aren't going the direction you expect, return to the core reasons for owning them and the big-picture trends in motion to determine what you should do. Based on the points outlined above, we're looking for entry points, not exit signs.

With that in mind, let's take a look at the recent correction. The following chart shows all corrections in gold in the current bull market that have been greater than 5%. It's been updated to show the recent pullback. (Click on image to enlarge)

From the recent high of $1,781 on February 28, we've fallen 9% (as of the April 4 low of $1,621). The average of all of these declines is 11.9%, so this correction - if it's over - hasn't been anything out of the ordinary.

Perhaps what makes it "feel" bigger is that we just experienced a 14.7% pullback in December, an unexpected drop that bucked the seasonal trend. We've also experienced one of the greatest concentrations of corrections in the current bull market: in the past 17 months, we've had four drop-offs of more than 5% in the gold price. I think this is a reflection of the increased volatility we've been warning about, though I know that doesn't make it more fun to swallow.

Let's take a look at silver. This chart measures corrections greater than 10% since 2001 and includes the recent decline. (Click on image to enlarge)

Silver has fallen 14.1% from its February 29 high of $37.23 (as of the April 4 low of $31.98). The average of these declines is 20%, so like gold, this pullback - if it's ended - is below average.

Also like gold, silver is coming off an 18.7% drop in December, along with two additional and much bigger corrections from the prior May and September. In fact, silver has now had five corrections greater than 10% in the past 15 months. It's thus understandable if you've been frustrated with its price fluctuations - though remember it will always be more volatile than gold.

Lest we focus only on the negative, let's also take a look at surges in gold and silver to see what might be ahead. This chart shows gold's advances of 10% or more since 2001, and includes the recent 16.3% climb that ended on February 28. (Click on image to enlarge)

The average of these surges is 22.1%. Given the trend in past years, I'm betting we'll see another one this year, and if I'm right, the only question is if you bought during the selloff to take advantage of it.

Here are the same data for silver, which includes the 32.1% run-up that peaked on February 29. (Click on image to enlarge)

The average of all advances greater than 10% is 33.9%. Will we see another surge like it this year? If history is any guide, it's highly likely. If so, current prices are awfully attractive.

So, is the correction over? If not, it certainly seems we're closer to the bottom than the top, and given the fact that both gold and silver have had more than their fair share of recent corrections, we're buying. In fact, the question in our minds isn't whether or not to average down, but how much. We're not going "all in," but we do think current prices represent a real bargain.

As far as I'm concerned, the current downdraft in gold and silver is an opportunity to prepare for the next upswing. But remember that the speculative upside is secondary. The primary reason to buy gold (and silver) is prudence; they are the two assets that can protect you from the big monetary and fiscal fallout that's headed our way.