In the Blind Spot (Moving to a ‘Pawnbroker for all Seasons’ model in central banking)

IZZY (COMMENT): The main impact is likely to be via the additional financing costs that shippers will have to bear. But while an extra three-week timeframe is disruptive it’s probably fundable, albeit with enough of an inflationary impact to cause central bankers to think twice about initiating an easing cycle.

IZZY (via Morning Central Banker): In a sweeping interview on Jan 12, which was broadcast simultaneously on Poland’s three largest networks — including on the newly reconfigured state broadcaster TVP — Tusk warned there were other ways of pursuing the outspoken head of the National Bank of Poland.

Context: Glapiński, an ally of the ousted former government, stands accused of having politicised the central bank during his tenure, notably by cutting interest rates by a full percentage point ahead of last year’s election in a bid to boost the then-ruling Law and Justice (PiS) party’s chances. The new government also blames Glapiński for allowing inflation to run unchecked and irregularities in the country’s Covid-era asset purchase programs. Glapiński, however, has made lengthy defences of his actions.

But there’s a new twist: During the interview Tusk alleged that the NBP was responsible for a 6-billion-zloty (€1.4 billion) shortfall in the national budget, due to a misdirection about the bank’s probable profitability over 2023. “I’m not impressed by this decision of Glapiński in the matter of the 6 billion zlotys,” he told reporters. “This is a bad decision from the point of view of the country’s interests.”

Plot thickens: The comments follow revelations in Polish media last December that the NBP wrote to the Finance Ministry in August outlining it was expecting to generate a 6 billion zloty profit for 2023 — a projection that was later used by the Finance Ministry to help balance its official budget.

FX volatility: A subsequent turn in the value of the zloty — which appreciated 7 percent versus the euro and 9.8 percent against the dollar in 2023 — has, however, forced the NBP to mark down its foreign exchange reserves significantly since then. Instead of a profit, economists now estimate the NBP could post a loss of as much as 20 billion zlotys. That would leave the NBP with no profit to transfer to the Finance Ministry, and the national books out of pocket by 6 billion zlotys. “It’s not something that will destabilise the budget,” Tusk said. “But it is a question of bad faith.”

Losses confirmed: The NBP confirmed on Monday it would be delivering a loss in 2023, but did not specify by how much. Some now think it could be as much as 26 billion zloty.

SCOOPLET: SOMETHING DOESN’T ADD UP! The Ministry of Finance confirmed to POLITICO this week that the losses pertain to a paper loss based on mark-to-market accounting. But they also pointed out that according to European budgetary accounting rules for central banks, FX profits and losses are not supposed to contribute to budgetary submissions. Only core operating profits or losses.

That suggests one of two things: Either Glapinski’s NBP flagrantly ignored the rules to help boost the Finance Ministry’s ability to balance its budget, registering an FX profit that should never have been registered. Or, something else was responsible for that 6 billion zloty figure, other than FX. One possible candidate for the second scenario is gold, which the NBP has been buying by the bucket load the last two years and which is trading at record highs.

While we need an accountant to confirm this, a preliminary reading of the budgetary rules suggests monetary gold is definitely accounted for differently to FX. In that case, Glapinski might still have the last laugh. The accounting may not have been wrong at all. It’s just that EU budgetary rules may have prevented the large portfolio losses from asset purchases and FX holdings from being registered at the time the budgets were being prepared. All will be revealed when the NBP publishes its annual report this quarter.

IZZY (via Morning Central Banker): In a two-part piece co-authored with Julien Pinter from the University of Alicante, McCauley argued that the push to make commercial banks shoulder the losses that central banks are currently taking would never have gotten started, had interest rates stayed low and had large-scale bond-buying produced gains for central banks.

The counter view, endorsed by among others the LSE’s Paul de Grauwe, asserts that reserve remuneration in an abundant reserve system amounts to a ‘subsidy to banks’ and is ‘nonsensical’.

Chesterton’s fence: But you’ve got to know your history, says McCauley. There’s a very good reason for the setup. The negotiations leading to the euro’s creation determined a small liquidity deficit would make banks more dependent on ECB financing. At the same time, financial centres that operated without required reserves (the BoE among them ironically), argued very forcefully that “a reserve requirement system was inconsistent with market principles.” Under that influence, it was determined that if required reserves had to be established, it shouldn’t be too costly for banks to hold them. The compromise was to offer remuneration on any required reserves.

Grave ramifications and a breach of contract: There’s bad faith involved in a sudden switch too, say McCauley and Pinter. When banks engaged with the ECB’s bond purchases, they did so on the understanding that those reserves would continue to be remunerated. The associated loss can, thus, be considered a type of default (albeit a legal one), comparable to a government not making its coupon payments.

“Instead of regarding the act of remunerating central bank reserves as a subsidy, one should thus see the act of ceasing to remunerate central bank reserves as the imposition of an unexpected tax on euro area banks,” wrote McCauley.

But that’s not the end of it! In the second part, McCauley predicts the tax would likely scare off businesses out of the euro area, and in such circumstances it wouldn’t be bank shareholders bearing the brunt of the tax but depositors.

The eurodollar precedent: The obvious corollary is that a similar arbitrage helped to fuel the rise of the eurodollar markets from 1970 to 1990 as a highly taxed dollar opened itself up to global competition. A similar effect would very likely be seen in euro markets, too. And while businesses and households could shift trillions of euro deposits to London and other offshore centres, the bulk of the burden would be felt by smaller and less wealthy depositors. Oh, and the overall governmental tax take would be diminished too.

Bottom line: Be careful what you wish for. The road to hell is paved with good intentions. And, er, there’s an academic war brewing between McCauley and DeGrauwe on the issue. And we hear DeGrauwe is planning a riposte as soon as next week.

DARIO (COMMENT): Sometimes I wonder whether Western media and elites are perversely seeking a full-blown right-wing revolution in Europe. The war on farmer subsidies is coming precisely when Europe can least afford it. We’ve had four years since the 2020 lockdowns, rising China tensions, and now the Houthi attacks on the Red Sea to realise the wisdom of onshoring and friendshoring critical supplies.

As inter-state and intra-state conflict continues to become a worrying normality in this de-globalising world, European elites seem more pressed in fulfilling abstract environmental and DEI targets than in securing our consumers’ right to decent prices and food security.

While agricultural subsidies represent an overwhelming amount of the EU budget, the outsized gains our continent gains from food security seems well worth the price of the Common Agricultural Policy (CAP). And that’s without getting into the argument of quality.

No other continent comes even close to the luxury of European produce. Foreigners waltz in joy through our supermarkets filled with all sorts of well-packaged, well-raised delights. While American agriculture remains ensnared in the production of low-quality, low-price foodstuffs, European consumers understand that quality must command a price. And there’s a reason for that: European food producers are the only ones worldwide who adhere to strict food regulations that ensure our products are mostly free of nasty pesticides and corn-syrup.

A Peruvian woman recently reminded me that Peru’s dishes are best consumed in Europe — nobody but the finest restaurants outside of Europe can afford to do anything but overcook their meats out of fear of intoxication.

Similarly, European bureaucrats have been gutting our own food production by liberally extending the equivalence of our ‘eco-friendly’ labels to countries such as those in Latin America, whose regulatory agencies are often captured by large food producers and who do anything but adhere to standards of safe food production. This enables sub-standard Brazilian bananas, for instance, still disinfected by aerially sprayed pesticides in contravention of Eco-friendly rules, to arrive on European shelves with the same Eco presentation, at a non-Eco cost, to the detriment of duped European consumers, and European farmers, whose production techniques have been adapted to meet European standards.

And yet, when European farmers take to the streets to protest, their concerns are dismissed out of hand by a media class seemingly disgusted by the rural world’s fierce independence and mistrust of central authority. Labelling them as far-right is the easiest cop-out, one which doesn’t require a hard look at the EU’s misguided focus on, ineffectively, saving the rest of the world at a price only European consumers and producers pay.

European voters don’t face such a hard choice. When met with seemingly absurd anti-farmer policies that mostly benefit wealthy and sub-par foreign producers, they will vote against the status quo in droves — as exemplified by the success of the Dutch Farmers Party following its own tractor revolt. This is a war Eurocrats can’t win, precisely because it goes against the EU’s founding pillars — a focus on good regulation, good quality produce, and strong national agriculture policies. And precisely at the time a de-globalising world is vindicating the wisdom of the CAP’s original approach.

IZZY (COMMENT): Alas, it was ever so. Taking key transport routes hostage in a bid to threaten food supplies and exert pressure on dominant empires has been a predatory strategy since, err, at least Roman times, if not before. Both Pompei and Caesar’s rule had to contend with the piracy scourge in the Mediterranean, while the Barbary Wars became one of the biggest threats to the rise of America. In both cases peace was only assured at the high cost of dealmaking with the pirates (i.e. paying them off with tribute).

In the Barbary case, the United States found itself paying as much as a fifth of the government’s annual budget to the pirates by 1797. According to Wiki, Jefferson won the 1800 presidential election against incumbent second President John Adams, in part, by noting that the United States was “subjected to the spoliations of foreign cruisers” and was humiliated by paying “an enormous tribute to the petty tyrant of Algiers”.

As for the tech angle, it’s a great example of why mass transparency has its negatives, too. And why, sometimes, there’s real justification for state and corporate secrecy.

DARIO (COMMENT): As time passes, it becomes clearer that the only solution against the Houthi attacks in the Red Sea must be diplomatic rather than military. American strikes on Houthi positions are akin to finding a needle in a densely mountainous haystack, long-prepared against such needle-finding activities.

Or as illustrated by Biden in a recent video:

“Are the strikes in Yemen working?” Biden: “Well, when you say they’re working – are they stopping the Houthi’s? No. Are they gonna continue? Yes.”

While one could argue that even if the airstrikes don’t effectively diminish the Houthi’s ability to project power — Western strikes are an anti-Western movement fund-raising, performance-enhancing drug — they are nevertheless a thorn in the side of logistics and governability in Houthi-controlled Yemen. 

Once started, American and British strikes must continue until some sort of diplomatic postulation brings the Houthis or Iran to the negotiating table. But harried by the unceasing rise in inflation being compounded by the rise in carrier fees and insurance, I suspect the Brits and Americans are already sat by it. 

DARIO (COMMENT): A human is different from other animals – it’s the only one who can trip over the same stone twice.

Truth is, Trump’s staunch America First position is nothing less than an opportunity for Europe to finally get its sh*t together militarily. When Trump was first elected, he carried out a slew of policies that shocked Europe’s elite.

A trade war against China? Railing against Germany and Western Europe’s low military spending? My oh my.

Trump’s China policy was only vindicated later, as Huawei’s deep penetration of Europe’s communication networks was revealed, and its continued escalations towards Taiwan meaning Trumpian anti-China politics were silently continued post-Trump by Biden.

Similarly, a Russian attack on Ukraine clearly exposed the dismal levels of military preparedness amongst NATO allies in Europe – with the sole exception of Poland – and particularly in Germany.

It’s only now that Germany’s elites are waking up to the perils of maintaining a military policy  ased on trauma and guilt. In other words, a non-military military policy.

There is nothing that could serve Europe better than to be semi-abandoned by our American allies. However lame, the saying “tough times create hard people” is certainly true — and living off the subsidy of American military expenditure has turned Europe into a defenceless continent that appears to depend on the wills and whims of Presidents elected on the other side of the Atlantic.

As Marc Rutte recently admitted:

This was exactly Trump’s main issue: That we were not spending enough. And he was right. He was right because America is 50% of NATO’s economy and spending about 70-75% of NATO’s budget (…) He was completely right in forcing us to live up to the 2% commitment.”

Furthermore, Trump’s America First policy is more than that: It’s a blessing to Europe.

The collapse of empires often occurs because their leadership insists on keeping them together no matter the cost — look at the Spanish Empire or the Ottomans. Those Empires that survived for generations often did so by splitting themselves apart into smaller, more manageable jurisdictions — like the Romans — or even the English and French empires, whose smartest moves were leaving their ex-colonies to declare independence in “good faith” but retaining significant economic control of them for decades to come.

America First also means Europe First (something only Emmanuel Macron seems to understand). A mock pulling out of Europe and showing the United States for what it is; not a helpful brother but a self-interested party — may open a window into putting our own interests first too.

As Bashir Al-Assad wisely said of Trump: What do we want more than a transparent foe?

The United States has been shielded by Western media and our European leaders as a friend of Europe for too long. As its profiteering on Russia’s invasion of Ukraine on the back of European consumers patently showed – as well as American intelligence’s incessant spying of our governments – the United States will naturally guard their own interests above Europe’s. Europe should take this brilliant opportunity to start doing the same.

DARIO (COMMENT): As the war on consumers rages by enforcing the uptake of EV’s over internal combustion engine cars, skeptics can be rewarded by laughing at the spate of debunking news regarding EVs performance in cold weather.

One brilliant article from Euronews is a case in point. Titled: “Was Oslo paralysed after all its electric buses broke down due to the cold?”, the newspaper committed the typical debunker’s sleight of hand — wildly exaggerating an original claim, and then reassuring readers that, no, the claim they wildly exaggerated was, in fact, wildly exaggerated.

This piece came on the back of news that Oslo’s new electric bus fleet was hamstrung by Norway’s cold — sharply reducing the electric buses range and forcing hefty costs on its transport network’s efficiency. The first morcel from the article touts EV’s greater efficiencies:

“Electric vehicles are more efficient than gas engines which means they can’t draw on heat produced by the motor to warm the inside of the car. They have to generate heat in other ways, hence using more energy from the battery which means losing in range.”

But worry not, dear EV fan, there are solutions — like spending more electricity charging the buses and installing diesel heaters:

“The buses need to stay plugged in, if possible, early on, before they start the route and stay plugged in overnight. When you do that, the battery can start and operate at this maximum range.” “Then the transit authorities have to either adjust their routes and notify passengers or equip the bus with diesel heaters for these few cold months to make up for the 30% loss in range if they want to maintain a full schedule and their usual routes,” explained the battery expert.”

That’s not to say EV’s don’t have their upsides. Their incredible acceleration and efficiency driving in (warm) cities (the start-stop nature of city traffic makes them more efficient there than internal combustion engines) means they’ve won over their fair share of consumers. The critical issue is the enforced adoption of EVs, and the unfair pressure this places on families that aren’t wealthy, by plastering a slew of restrictions on internal combustion cars that are generally cheaper to purchase, cheaper to maintain, and which have much longer lifetimes.