Pumping more money into banks but leaving them unregulated doesn’t help

End of the signing ceremony of an EU/China key partnership on 5G: handshake between Miao Wei, Chinese Minister for Industry and Information Technology, on the right, and Günther Oettinger, Member of the EC in charge of Digital Economy and Society, 2nd from the left, in the presence of Ma Kai, Chinese Vice-Premier, 2nd from the right, and Jyrki Katainen, Vice-President of the EC. Date: 28/09/2015. Location: Beijing - Diaoyutai State Guesthouse. © European Union, 2015 / Source: EC - Audiovisual Service / Photo: Olli Geibel.

End of the signing ceremony of an EU/China key partnership on 5G: handshake between Miao Wei, Chinese Minister for Industry and Information Technology, on the right, and Günther Oettinger, Member of the EC in charge of Digital Economy and Society, 2nd from the left, in the presence of Ma Kai, Chinese Vice-Premier, 2nd from the right, and Jyrki Katainen, Vice-President of the EC. Date: 28/09/2015. Location: Beijing – Diaoyutai State Guesthouse. © European Union, 2015 / Source: EC – Audiovisual Service / Photo: Olli Geibel.

On Thursday 25 February, this newspaper concluded that “the other major central banks in Europe, China, Japan and elsewhere appear ready to fill the gap that the Fed plans to leave in the ‘money for nothin’ game”. This week’s developments completely justified this prediction. The immediate result is a new appreciation of the dollar with the euro and the Chinese yuan. Let’s see the details.

Last Monday, Eurostat, the EU statistical service released its flash estimate for the February inflation in Eurozone. According to this, the inflation rate in the euro area dived last month below the zero level at -0.2% from 0.3% in January. This is not a small thing at all. Half a percentage drop in the rate of consumer prices change tempo in a month rings alarm bells.

Draghi will do his trick

It seems that Mario Draghi, the President of the European Central Bank knew something more than all of us, when ten days ago he quasi announced a new increase of ECB’s free liquidity injection in Eurozone’s banks. It’s almost certain then that in the next meeting of ECB’s Governing Council on 10 March, he will propose a new increase of the upper limit of central bank’s extraordinary quantitative easing measures.

To be reminded, that two months ago the ECB brought the limit of its extraordinary monetary easing ceiling from €1.14 trillion to close to €2.0tn. It is very probable that this time the limit will be set by the Governing Council well above the €2tn and predictably this will not be the end. There is more free money though flowing in the global financial system. Let’s follow it.

It’s the turn of China

Last Tuesday, it was the turn of the Chinese central bank, the People’s Bank of China who injected more cheap money into the banking system of the gigantic country. In order to do this the monetary authorities further reduced the mandatory reserves of banks, so as to release additional liquidity in the banking system. As a matter of fact, the compulsory reserves were reduced by half a percentage unit to 17%.

It must be mentioned that this is the fifth time since February 2015 that the Chinese central bank is doing that. It’s not a coincidence that all along these months the selloff in the country’s two stock exchanges in Shanghai and Shenzhen holds well. Obviously, the Chinese authorities are trying to avoid the worse by injecting new money into the system through reductions of the obligatory bank reserves.

More money

This means the banks can freely use an additional percentage of the total volume of deposits as they want. The authorities’ token target is that the loans to the real economy increase and thus helps it grow faster and help the country and the rest of the world, to arrest the fall of the growth rate. It’s questionable, however, if the banks will act along these lines. The Chinese banks are suspected to have indirectly and also are seen to have directly invested heavily in the country’s capital markets. In this way they created the super dangerous bubble in the two stock exchanges which burst last March and has since then continued deflating.

Obviously, both the Chinese authorities and the banks know, without saying it, that the new money will be dumped by the lenders in the stock exchanges to control the rather uncontrollable selloff. But this is not just a Chinese problem. Exactly the same disease has infested the entire global economic system including the financial and the real markets. During the past months this phenomenon engulfed the stock and most of the commodities markets, including oil. And its name is of course ‘crisis’. Let’s see all that in detail.
The bubble burst

The crisis is here

In the case of China, the crisis is more menacing because of her less complicated financial system and her barely regulated stock exchanges. The story goes like so. For the last twenty five years the country grew with an unbelievable robust tempo, creating very good profits in the real economy. However, the financial sharks, local and global, wanted to use those profits to create super gains not minding about the market bubbles.

In detail now, on the very hefty flow of real profits, they created a ‘machine’ which produced many times over financial gains in the stock exchanges. The ‘machine’ worked well for as long as the real economy produced enough profits. However, now that the industry and the economy as a whole have reached unsustainable overcapacity and overproduction levels, everybody has problems. It’s interesting to note that there are two completely independent stock exchanges in the huge country, a fact that may signify the existence of two equally independent centers of politico-economic power.

A paper financial construction

In any case, the time came and the underlying real economy is taking a deep breath. The financial superstructure though is suffocated, because of the great weight of the superimposed financial construction, which proves now to be unbelievably heavy. Not to forget, that even labor relations in the immense Chinese industrial sector are currently changing, another menace to profit percentages.

These developments plus the problem of overproduction in the economy (industrial overcapacity) are currently leading the percentage of real profits to a devastating fall. There is information coming in about government plans for millions of layoffs. The bad news in the real economy though has multiple repercussions in the financial sector. As a result, the Chinese financial superstructure is at this time quite unstable, with bubbles keeping bursting in the stock exchange. At the same time, an increasing number of firms are going bust.

All together

What we are now witnessing is that the large weight of China in the global economic system has instantly transmitted the problems to the rest of the world. Add to that the difficulties the US and more so Europe have to secure a sustainable growth path, and the outcome may be a new Armageddon.

It’s exactly this, that both the People’s Bank of China and the ECB are now trying to counter by exploiting their experience from the 2008-2010 crisis. Visibly, their answer is more money for the banks, as the US central bank, the Fed did six years ago. It remains to be seen though if the recipe is to work once more on the tired from the last crisis body of the world economy. Not to say anything about the plights of the civil society in both the US and Europe.

The rise of Donald Trump in the US and of the extreme right in Europe are infallible signs that this time things will not evolve linearly. A number of national deadlocks may lead to a dangerously unstable international arena, both politically and economically.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

CDNIFY @ TheNextWeb 2014

EU Council approves visa-free travel for Ukraine and cement ties with Kiev

Refugee crisis update: Commission is struggling alone with little help from EU or G7 leaders

This is how people in Europe are helping lead the energy charge

Quality Internships: Towards a Toolkit for Employers

Malta and Slovakia: serious shortcomings in the rule of law

This robot has soft hands. It could be the future of sustainable production

Love unlimited

Banking package: Parliament and Council reach an agreement

Defence: European Commission paves the way for first joint industrial projects under EU budget

The anti-vaccine movement shows the peril of a post-truth world

Everything you need to know about water

Reform of road use charges to spur cleaner transport and ensure fairness

Protests, violence in Haiti prompts international call for ‘realistic and lasting solutions’ to crisis

It’s time to fulfil the promises made to women 25 years ago

JADE Spring Meeting 2016 highlights

The JADE Spring Meeting is about to begin

European Youth Event 2016 – bridge between youth and policy makers

Contact the Sting

China in My Suburbs

World Population Day: ‘A matter of human rights’ says UN

Cybersecurity needs a holistic approach. Here are three ways to build protection

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

European Commission reacts to the US restrictions on steel and aluminium affecting the EU

Turkey presents a new strategy for EU accession but foreign policy could be the lucky card

Why carbon capture could be the game-changer the world needs

How telehealth can get healthcare to more people

Two days left until General Data Protection Regulation (GDPR), lots of newsletter opt-outs but does the EU citizen really know?

Can the world take the risk of a new financial armageddon so that IMF doesn’t lose face towards Tsipras?

From glass ceiling to glass cliff: women are not a leadership quick-fix

MEPs vote to limit negative impact of no-deal Brexit on citizens

How tomorrow’s buildings will make you – and the planet – healthier

Mainland Europe adopts Germanic cartel business patterns

UN nuclear watchdog will help verify DPRK nuclear programme, if agreement forthcoming

FROM THE FIELD: How the smell of fresh bread transformed one refugee life

Economic sentiment and business climate stagnate in miserable euro area

The EU Commission lets money market funds continue the unholy game of banks

The power of digital tools to transform mental healthcare

“The Belt and Road Initiative should be mutually beneficial for EU and China and every participating country”, Vice-President Papadimoulis of the European Parliament underscores from European Business Summit 2018

EU unveils plan to accelerate Capital Markets Union ahead of London’s departure from the bloc

Drugs cost too much. There is a better way to fund medical innovation

Make progress or risk redundancy, UN chief warns world disarmament body

Is there a way out of the next financial crisis? Can more printed money or austerity save us all?

Here’s what a Korean boy band can teach us about globalization 4.0

Blockchain can change the face of renewable energy in Africa. Here’s how

From inconvenience to opportunity: the importance of international medical exchanges

Promoting rule of law and fundamental rights in the EU

How can we regulate disruptive technologies?

Parliament backs a modernised EU electoral law

Supercomputing could solve the world’s problems, and create many more

Globally, youth are the largest poverty-stricken group, says new UN report

Risks rising in corporate debt market

Amazon indigenous groups want to create a nature sanctuary the size of Mexico

Unlock the value proposition for Connected Insurance

Managing and resolving conflicts in a politically inclined group of team members

EU budget: Stepping up the EU’s role as a security and defence provider

Mali: UN chief calls for calm as clashes leave over 20 dead in Mopti

Is Erdogan losing game and match within and without Turkey?

The Council unblocks all EU budgets

Italy’s revised budget remains roughly unchanged waiting for Europe’s fury

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s