Pater Tenebrarum's Blog

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.

If the euro were abandoned, then the previous regime of free-floating fiat currencies, each of them administered by its own central bank, would presumably be reestablished. After all, unless the euro were to revert to its previous incarnations of national free floating fiat currencies the supply of which can be altered at will be the national central banks, there would be no point in leaving the euro area.

It appears that market observers are only very slowly coming around to grasping the fact that what the ECB has done in December does indeed amount to a major dose of monetary pumping. The misunderstandings center mainly on the use of the ECB's deposit facility by banks, which overshadows the far more legitimate debate over whether the commercial banks are going to use ECB funding to play the sovereign debt carry trade or rather 'play it safe' in view of the large amount of bank bonds maturing in the first quarter.

Among the big movers in CDS spreads we have of course Hungary, which has become a new focus of market worries. Otherwise no large moves have occurred (Spain is an exception to that as well, see below), but euro basis swaps have recovered smartly now that end of year related liquidity pressures have eased.

As a friend of ours remarked when sending us the link to Paul Krugman's December 29 editorial, 'he's trying to get in the last word for the year'. The editorial is entitled 'Keynes Was Right' and it is at least somewhat reassuring that it appeared on the NYT's 'opinion pages', because that is all it amounts to – an opinion.

Below is a chart by Scott Barber showing how the first LTRO has affected the ECB's balance sheet. As 'only' about € 200 billion of the € 490 billion in this LTRO were additional funds (the remainder were rollovers of a previous LTRO), the balance sheet didn't increase by the full amount allotted.

While all over Europe, governments are forced to face up to the fact that the markets have suddenly become alert to the dangers posed by the huge debt loads carried by modern-day welfare states, Japan's government just piles on more and more debt on its existing debtberg with seeming impunity.

Yesterday the leaders of the euro area were confronted with another predictable development: The UK is not going to pay up for its share of the bilateral IMF loan program that is supposed to add to the bailout funding for the euro area by providing 'monetization through the back door'.

As expected, the Fed failed to adopt fresh inflationary measures at its December meeting, which was greeted with disappointment by the financial markets. Why the markets appeared surprised by this is one of the enduring mysteries of trading on FOMC day.

It didn't take very long for it to become clear that the new 'fiscal compact' fantasy negotiated last week by Europe's political leaders may be unraveling just as fast as it was dreamed up.