Honest Money

Gold is Wealth Hiding in Oil

ECB Autonomy and Anatomy of Compromise

Posted by Ivo Cerckel on May 5th, 2009

Will the ECB, on Thursday 07 May 2009, try to figure out a compromise between its mandate of price stability and printing money?

A good part of the new money the [central bank] creates finds its way into the stock market. This is because [that central bank] spends this money to buy bonds. Very often, the person of institution who sells bonds to [that central bank] will buy stocks with part of the money he receives. So the stock market can be especially sensitive to monetary growth.
(Harry Browne, “The Economic Time Bomb”, New York, St Martin’s Press, 1989, p. 85)

Monetarisation is the buying of guv’mint bonds by the central bank of the guv’mint issuing the bonds, says Wikipedia.

A Catch-22 is a situation which presents the illusion of choice while preventing any real choice, says Wikipedia.

The present systemic crisis brought us in a Catch-22 position.

We are told that we could put all existing and future debts on the deficit side of our balance sheets and value these debts on a market to market(-price) (MTM) basis. This will however result in a deflation of astronomical proportions. The level of these debts is indeed too high to allow for a decent balance sheet.

If, on the other hand, we will continue to monetarise these debts, we will face hyper-inflation whose effects are as bad as those of deflation.

It is impossible to find a compromise between deflation and inflation since none of them has a valid claim and some value to offer to the other.

As Ayn Rand indicated:
A compromise is an adjustment of conflicting claims by mutual concessions. This means that both parties to a compromise have some valid claim and some value to offer each other. And this means that both parties agree upon some fundamental principle which serves as a base for their deal.

Opportunists will now impose themselves in this Catch-22 in order to promote their own dubious interests.

In the meantime, the crisis is warming for its final debacle.

The European Central Bank (ECB) is the most recent central bank to have been instituted. On Thursday, 07 May 2009, its governing council should announce its non-standard measures to aggravate the crisis.

The ECB’s Freegold concept is now being copied by the People’s Bank of China.

Every Large Crisis (1913/1933/1971/ ????) in the past was accompanied by a gold shock.

What will the ECB decide on Thursday when it will announce its new measures to aggravate the crisis?

Will it follow the example of former crypto-libertarian Belgian prime minister Guy Verhofstadt, in his book “The Road out of the Crisis”, and now argue for more financial regulation?

From The Times
May 5, 2009
ECB poised to cut interest rates to record low of 1%
Gary Duncan, Economics Editor
Economists also expect the ECB to follow the lead of the Bank of England and the US Federal Reserve and begin a programme of so-called quantitative easing (QE) — pumping extra funds into the economy by using newly created money to buy assets such as government or corporate bonds. This is similar to the “printing money” tactics adopted in Britain and America and would be aimed at reviving the economy by increasing the flow of cash and credit while seeking to drive down commercial, market interest rates. UNSNIP

Will the ECB, on Thursday 07 May 2009, try to figure out a compromise between its mandate of price stability and printing money?

Ivo Cerckel

3 Responses to “ECB Autonomy and Anatomy of Compromise”

  1. Ivo Cerckel Says:

    My advisers want me to mention what follows:

    Venezuela Orders Gold Producers to Sell More Locally (Update1)
    By Daniel Cancel and Matthew Walter
    May 4 (Bloomberg) — Venezuela more than doubled the amount of gold that local producers must offer to the central bank in a bid to increase its reserves of the metal and reduce reliance on supporting them with U.S. dollars.
    The Finance Ministry said today that 70 percent of gold produced in Venezuela must be sold domestically, and 60 percent must be offered first to the central bank, in a resolution published in the Official Gazette. The remaining 30 percent can be exported. Previously, 20 percent had to be offered to the Central Bank.

  2. Honest Money » Blog Archive » ECB semantics versus Wolfram Alpha Says:

    […] ECB Autonomy and Anatomy of Compromise […]

  3. Ivo Cerckel Says:

    Here’s why I shouldn’t have posted that Venezuela thing:

    Chavez seizes oil service firms
    Lake Maracaibo, on 8 May 2009.
    Mr Chavez is tightening his grip on the oil industry
    Venezuelan President Hugo Chavez has sent troops to take over companies that provide services for the oil industry.

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