Whatever it Takes! – Unless we cannot afford it!!

Dear Members,

In case there are any doubts left as to how serious this is, we are about to hit the buffers.

As John Redwood said last night ” This is not sustainable”

Our public sector is finding out (You would think they would know, or at least care) that small firms carry one month of cash flow, large firms one to three months and governments, three to nine, and here we are in month three.

They say whatever it takes to support our credit ratings, but that merrygo round is coming to an end.

The Courts are ruling that you cannot just run the printing presses to spend your way out of this.

 

My thanks to Nick Stephens and Blonde Money for bringing this to my attention.

The Graph shows the effect of C19 on the market, the intervention of the Governments injecting liquidity (Cash) and the leveling out of that effect. Demonstrating a new Normal of lower asset values and lower growth.

This says that we are not returning to normal, we will need to reset and start again.

This post should be read in parallel with Public sector costs Triple as the money runs out

 

Whatever it takes?

  • Today the German constitutional court clipped the wings of the ECB, ruling that QE took them too far into economic, rather than monetary, policy.
    • For more on how this curtails ECB powers, please read our summary from DeutscheMoney below
  • Yesterday the NY Fed released details of its corporate credit facilities, clipping the wings of the massive Fed purchase programmes by demanding issuers must provide evidence they couldn’t find adequate credit elsewhere, and putting a ceiling of a 1% premium to NAV on any fixed income ETF purchases.
    • The High Yield ETF HYG was merrily booking premiums well above 1% in anticipation of buying from the Fed. Now they’ve been reminded that the Fed is trying to keep markets open, rather than up

  • Last night, the UK Chancellor clipped the wings of the furlough scheme, warning that as it was costing the government almost as much as the NHS, it’s “clearly not a sustainable situation”.

Although fiscal and monetary authorities have all promised to do whatever it takes, the sheer scale of the recession is causing them to qualify those three simple words. Whatever it takes to avoid a depression; not whatever it takes forever whenever however. The authorities understand that it’s not possible nor desirable to prop an economy back up to its previous levels, let alone its previous growth rates. They are providing relief, not stimulus.

Stock markets have had their inevitable Pavlovian response to the huge influx of liquidity. But even this is petering out, with Fed purchases slowing down, as pointed out by the always excellent US economist Julia Coronado at MacroPolicy Perspectives:

The authorities avoided their worst nightmare: a financial markets meltdown on top of an economic crisis brought on by a health crisis. They can now take a breather. The recession hasn’t – yet – been priced in.

But while they don’t want you to price in the recession, they know inevitably that will come. This Friday’s US jobs report should provide a timely reminder of the reality. Estimates range from 20 million to 30 million people out of work. For everyone who thinks the economy can bounce back, just think for a moment about those people. Even if just a fraction of them don’t have jobs to return to, or if they fear for their job security, or if they fear the virus…. then consumption levels will be significantly lower than would otherwise be the case.

Inevitably policymakers want to inspire confidence to mitigate this reaction. Hence the desire to reach for those three little words. “Whatever It Takes” is very beguiling. But their intention is not to drive stock markets up to new all-time highs or save everyone’s jobs. There are political limitations. Over-promising and under-delivering is not rewarded at the ballot box.

Here’s DeutscheMoney with an explanation of how politics has curtailed the ECB’s capabilities:

The Good, The Bad, and the Ugly on the German Constitutional Court (FCC) ruling

  • The Good(ish):
    • The FCC deemed the CJEU’s judgement as ultra vires (operating beyond its powers), seeing as they did not account for the “actual effects of the PSPP in its assessment of the programme’s proportionality” nor did they conduct “an overall assessment and appraisal.” But the requirement for the ECB to prove the PSPP’s proportionality seems manageable.
    • Voicing many concerns that have been present in German conservative circles (the impact on savers, the saving of economically unviable companies, the dependence on Member State politics), the FCC argues that it is not possible to say whether these consequences were sufficiently considered by the ECB.
    • They aren’t saying that the PSPP isn’t proportional but that it hasn’t been shown sufficiently. They have given the ECB three months to show the proportionality, i.e. to adopt “a new decision that demonstrates in a comprehensible and substantiated manner” that the PSPP’s objectives are proportional to the economic and fiscal policy effects. Otherwise, the Bundesbank can no longer participate. Hopefully a piece of cake for the ECB’s lawyers and economists.
  • The Bad:
    • Central bank independence has never meant unconstrained freedom. But it can be interpreted differently depending on the policymakers in charge…
    • According to the verdict, ECB independence “relates only to the powers conferred upon it in the Treaties and the substantive exercise of such powers but is not applicable with regard to defining the extent and scope of the ECB’s mandate.” The “mere assertion of monetary policy objectives” is not sufficient. Independence stops where economic policy, rather than monetary policy, begins.
    • Going forward, who will determine where this border lies? And the ECB will have to act more cautiously for fear of crossing it
  • The Ugly:
    • Although the judges stressed that today’s decision concerns PSPP only, the new Pandemic QE programme, PEPP, is under threat as it hinted that limits from PSPP could be eased
      • ‘To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.’
    • The FCC argued that Article 123 TFEU (no monetary financing) was not violated for a number of reasons, including the purchase limit of 33% per ISIN, the purchase according to the ECB’s capital key, and the minimum credit quality assessment. The 33% limit may be arbitrary, but the FCC believe having a limit is one of the key conditions required in order not to over-step the boundaries
    • Law suits against PEPP were bound to happen but this certainly gives fodder to the claimants. It also means that the ECB has to tread more carefully

It’s a timely reminder, ahead of tomorrow’s Commission announcement, that the EU can’t forever rely on the ECB to do the heavy lifting for both monetary and economic policy.

In case of interest, short and long version of the verdict below (in English):
https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html
https://www.bundesverfassungsgericht.de/SharedDocs/Downloads/EN/2020/05/rs20200505_2bvr085915en.pdf?__blob=publicationFile&v=2

– By Charlotte Waldraff, DeutscheMoney

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