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.

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