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.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

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

Tuesday’s Daily Brief: prizewinning journalists freed in Myanmar, new tracking tool for suspected terrorists, and a global bid to stop snakebite deaths

UN rights chief calls for release of hundreds abducted and abused in South Sudan

5G security: Member States report on progress on implementing the EU toolbox and strengthening safety measures

The world’s e-waste is a huge problem. It’s also a golden opportunity

Mergers: Commission opens in-depth investigation into proposed acquisition of Transat by Air Canada

Road safety: Data show improvements in 2018 but further concrete and swift actions are needed

Young? You should work out the entrepreneurial heart before the mind

Towards a seamless internal EU market for industrial goods

What options the new President of Ukraine has?

World Digital Media Awards winners announced at WNMC.19 in Glasgow, in association with The European Sting

Europe and the tragicomic ‘black sovranismo’

Young people worldwide can ‘determine the future of migration,’ says UN senior official

FROM THE FIELD: Enduring freezing winter in a war zone

A UN-backed boost for women-run businesses in the developing world

This is how a smart factory actually works

Nagasaki is ‘a global inspiration’ for peace, UN chief says marking 73rd anniversary of atomic bombing

The Chinese spirit

Draghi tells the EU Parliament his relaxed policies are here to stay

How Big Food is responding to the alternative protein boom

Medical Devices Regulation: Commission welcomes Council support to prioritise the fight against coronavirus

EU budget deal struck with Parliament negotiators

Trees in ‘green’ Cameroon refugee camp, bring shade and relief from ‘helter-skelter’ of life

Jeroen Dijsselbloem new Eurogroup president

Why India can show us how to achieve growth with purpose

This disease once wiped out 60% of Europe’s population – and now it’s back

Nearly 900 children released by north-east Nigeria armed group

European Citizens’ Initiative: Commission decides to register two citizens’ initiatives

‘Education transforms lives’ says UN chief on first-ever International Day

The Commission calls for a climate neutral Europe by 2050*

Staying home? Here are 5 exercise tips from the World Health Organization

These cities score an ‘A’ for environmental action – but hundreds more are falling behind

Companies have a new skill to master – innovation

How the technology behind deepfakes can benefit all of society

First EU collective redress mechanism to protect consumers

It’s Trump’s anti-globalization and inward-looking rhetoric that perturbs GOP and US

3 reasons why business leaders can’t afford to ignore diversity

Refugees now make up 1% of the world’s population

COVID-19 and the pursuit of financial inclusion in Pakistan

Upgraded EU visa information database to increase security at external borders

Ebola: EU announces new funds to strengthen preparedness in Burundi

Here’s how drone delivery will change the face of global logistics

Mozambique: UNICEF Goodwill Ambassador Orlando Bloom meets the child cyclone survivors who’ve lost everything

Why does death prefer to hold a scythe rather than my hand?

Spotlight Initiative – EU and UN fight against domestic violence in the Pacific region

10 ways regulators need to change in 2020

Mixed news about the Eurozone economy

Why symbols of injustice matter and what to do with them

World Health Organization calls crisis meeting over deadly Ebola outbreak in DR Congo

Refugee crisis update: EU fails to relocate immigrants from Greece and Italy

UN General Assembly President defends ‘landmark’ migration compact

On International Youth Day the European Youth Forum calls for true youth participation

How our food system is eating away at nature, and our future

New EU telecom rules: latest actions in time for transposition deadline

EU-US trade war? EU calls for logic while Trump’s administration is a loose cannon in a dangerous lose-lose situation for global prosperity

Long-term exposure to air pollution is like smoking a pack of cigarettes a day

The Five Chinese Girls

The EU Commission implicates major banks in cartel cases, threatens with devastating fines

How the institutional response to COVID-19 can prepare us for climate change

What’s everyone talking about at Davos 2020?

How AI is bringing the ‘dark matter of nutrition’ to light, unlocking the power of plants

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