Category Archives: GIS Statements

Monetary Voodoo

GIS statement by Prince Michael of Liechtenstein

The governors of the European Central bank met on December 2 and decided to make a further small reduction in already negative lending rates, while extending their bond purchasing program by another six months to March 2017. In its unsuccessful way, the ECB is trying to resolve a trilemma. It wants to spur economic growth through low to negative interest rates, hit its targeted inflation rate of 2 per cent by increasing money supply, and relieve the fiscal pressures on member states by a huge bond purchasing program.

The idea is that by paying negative rates for deposits at the central bank, the ECB will prod commercial banks to increase lending to corporations and consumers, rather than maximize liquidity. In addition, commercial banks are expected to pass these negative rates along to depositors, discouraging savings and boosting consumption.

This plan is understandable and logical, in a shortsighted way. The difficulty is that it is detrimental to the economy in the long term and completely unsustainable. I have yet to hear a convincing explanation of why the magic figure of 2 per cent inflation is beneficial.

In order to alleviate the debt servicing problems of all-but-bankrupt European states, the ECB began quantitative easing in March 2015. The central bank purchases 60 billion euros of sovereign debt each month under this program. Counting the latest six-month extension, the total cash injection provided by QE comes to 1.46 trillion euros.

This policy of flooding the economy with liquidity has not spurred growth. While inexpensive credit can support expansion in a healthy economy, it cannot create growth. What cheap money does do effectively is to destroy savings, especially retirement savings.

Sustainable growth happens when businesses decide of their own free will to invest. To make such decisions, companies need to have confidence in the future. Today, this confidence has been undermined by erratic policies and overregulation.

The quickest way to restore trust would be to introduce the dreaded (by politicians) structural reforms that truly unleash private investment. Public spending on useful infrastructure could play a supporting role in this recovery plan.

Bond buying is not solving the euro area’s sovereign debt problem because member states continue to overspend. What it does do is buy time, which the national governments use to put off reforms.

Consumer price inflation has not returned to 2 per cent, but asset inflation is evident in stocks, bonds and real estate prices. This kind of sustained growth normally ends in a bubble.

In voodoo and tribal religions, priests intercede with the supernatural to ensure the welfare of the community. Looking at the long term causes and consequences, there appears as much logic in a witch doctor’s potions to dispel evil spirits as in the ECB’s efforts to heal the economy. Except the witch doctor probably causes less harm.


Read the original statement “Monetary Voodoo” here -> GIS


Terrorism and the money-trail mirage

GIS statement by Prince Michael of Liechtenstein

French investigators suspect that the perpetrators of the November 2015 terrorist attacks in Paris used prepaid debit cards to cover their expenses. New measures will be proposed by the European Commission next month to make it harder to finance such operations, writes Prince Michael of Liechtenstein.

This “action plan” will outline a series of steps, including legislation, for consideration by the next European Union finance ministers’ meeting in February, according to the Commission’s Vice President Valdis Dombrovskis.

France is proposing to cap the sums that can be loaded onto prepaid cards, and to curb the conversion of virtual or crypto-currencies such as Bitcoin into legal tender. The French also claim that Bitcoin allows anonymous transactions that cannot be monitored, which happens not to be true.

Two aspects of this issue are striking.

Since the 9/11 attacks, Western governments have insisted that finances are the Achilles heel of international terrorism, which would wither once the money flow is cut off. The financial services industry has been doing its utmost to shut down these flows for 15 years – to little effect. Perhaps the lesson is that there is nothing significant to shut down. Terrorism is not particularly expensive. Attacking the money trail sounds good, but distracts us from the real threat.

Another, cynical aspect should not be ignored. Cash and crypto-currencies have become a thorn in the side of certain central banks and governments. Cash makes it more difficult for governments to control people’s behavior or for central banks to misappropriate savings by applying negative interest rates. The same applies to crypto-currencies, which compete with legal currencies and thus force monetary policies to become more efficient. In this sense, fighting terrorism could just be another pretext for protectionism.

I am reminded of a popular Twitter meme showing a herd of sheep staring out of a pen. Mummy sheep asks: “Kids, do you know why we are permanently surrounded by those barbed-wire fences?” Baby sheep compliantly answers: “I do, Mummy – it’s to keep the terrorists out, so we can all enjoy our freedom.”


Read the original statement “Terrorism and the money-trail mirage” here -> GIS