To say central banks have intervened far too long within the financial markets would be an understatement. However, what can not be overstated is just how far down the “rabbit hole” of lunacy they are continuing to push all measures of fundamental business understandings such as, competitive advantage, governance, price discovery, viability, and a whole lot more. Not withstanding, the devastating effect these disruptions are placing upon the population’s at large that rely on these very businesses for both their own general welfare (as in employment) but also, the taxes they pay that go into general funds of all sorts whether it be local, state, federal et al.
Today, everything (and I do mean everything!) one thought they understood about free market capitalism has been thrown into the wastebasket of history and replaced with edicts and dictates set forth by an un-elected gaggle of economic theorists who’ve decided the world of business is theirs to control. How do they control it? Hint: The courage to print!
Whether you’re a solo-practitioner or CEO of a global concern one thing should be making you very, very, very (did I say very?) concerned: The recent proclamations, as well as, delivery from the ECB’s Mario Draghi.
Mario Draghi not only openly stated, but did so in a manner which many put into the “defiantly so” camp, that he has the right, the means, and wherewithal to purchase corporate debt as he see’s fit. If that doesn’t shake you down to your business core – you just aren’t paying attention.
I’m not trying to be bombastic or hyperbolic just for the fun of it. I’m absolutely stunned at just how openly brazen Mr. Draghi’s comments, as well as, retorts when asked about not only if he would, but rather, if he should intervene (e.g. purchasing) into the differing stratum of corporate bonds. I must state this again: “If that doesn’t shake you down to your business core – you just aren’t paying attention.”
So why is this of such concern some will ask. After all as the thinking will go: “Didn’t we do something similar with GM™?”
Well, yes we did – and the ramifications of that intervention are still yet to be felt. (i.e., as to how the rules of financial law play out, or applied from here on out) However, as large as GM is and the ancillary companies that were both helped, as well as, hurt by the government’s intervention. There are two distinct differences in both application as well as scale. First…
Whether you approve or disapprove of the decision, at the very least, it was made by elected officials. In other words (like it or not) people voted for those whom made the decision. It’s not a distinction without a difference. Nor, should that fact be lost. (please save the emails – this isn’t about who currently holds or, will hold the title. This is about what is, plain and simple.) Yet, with that said it’s in the second part where concerns should manifest…
GM was in many ways an isolated event. Draghi’s proclamation of both his intention, as well as, surety turns the volume of that in both size and scale up to 11!
Let me make it clear just how brazen central banker’s are increasingly becoming as to their function and purpose when it comes to their interpretation of what their “mandate” is using Mr. Draghi’s latest words in response to the “should” idea. Ready?…
“We have a mandate to pursue price stability for the whole of the eurozone, not just Germany,” he said. “We obey the law, not the politicians.”
Ponder that statement transposing Mr. Draghi with any other central bank and you can see just how concerning this is all rapidly devolving. Today it’s Draghi. Tomorrow?
This and more is referred to as a “lament” by the WSJ™. Personally, I never thought of someone giving the middle finger while proclaiming like it or not, this is what they’re going to do as a “lament.” But that’s just me I guess.
So with this newly professed (as interpreted) “mandate” Mr. Draghi will now have the power (as by decree) of corporate life and death (via their bonds) using the business acumen and economic theory residing within that bastion of business acuity The ECB as to buy or sell corporate bonds at a pace, or rate, it has deemed “appropriate.”
And where will this new-found “purchase power” come from? Hint: A keystroke which fills a bank balance sheet with funds created ex nihilo. Am I the only one that sees an issue here?
Let me put this into more blunt terms as well as examples…
Does anyone think for a moment that the leaders of let’s say, oh I don’t know: China, are going to sit idly by as Mario Draghi decides which companies will be able to compete with an unfair advantage (such as buying their bonds) against them? China would love nothing more than to return “the finger” to their own printing presses all the while pointing out the blatant hypocrisy of the ECB’s monetary policy. Can you say Yuan devaluation? And that’s just for starters.
Mr. Draghi boldly proclaims “We obey the law, not the politicians.” Well, that may be how he currently views the dynamic. However: how many politicians from not only the Euro-zone but from across the globe will just sit back idly as their once touted symbols of free enterprise make a mad dash to reorganize their corporate structure to become headquartered in the EU as to “get a seat at the table” when Draghi begins dishing out the monetary equivalent of corporate sustenance?
If you thought corporations liked tax inversions – just wait till you see how they react to the idea of unlimited financing of their bonds! And yes, “unlimited” is accurate because as we now have proof. “whatever it takes” means just that – “whatever.”
The ECB’s latest “lament” turns everything about business dynamics onto its head. No more is it “build a better mousetrap.” Mr. Draghi is now the one deciding who will “live or die” as to build one. There’s another term for that: it’s called playing economic god.
Again, the only differentiation as to whether or not many a company will live, or perish, via their bond funding will be whether Mr. Draghi believes they should. All via a nod and a keystroke. And maybe you thought the “god” reference was a little over the top at first blush. Not so when put under this light. is it?
What an absolute debacle this will create in more ways than there is digital ink to describe it all. It’s an absolute abomination to anything related to business and free enterprise and it should be denounced boldly, firmly, and vociferously by not only politicians – but by the business community itself. For as I stated: It’s an abomination of everything once thought of as free market competition. So much so it makes the BoJ or even Krugman look fiscally responsible by comparison.
Let’s use some real world hypothetical examples. (these are meant to be overly simplistic)
Who gets to build a “better” jet engine: the better company and/or design team with limited access to funds? Or, the company whose headquarters (whether newly configured or original) is located within the ECB’s purview as to purchase their corporate debt?
How about a car company? Software company? Phone maker? Retailer? ____________(fill in the blank.)
Competitive edge? Who cares! All that will matter is whether or not your company has access to the ECB’s bond program. And if so? Bottom line inefficiencies, or product advancements be damned.
Competition? Forgettaboutit! Unless they’re on Mario’s list – there is no competition. The only competition one needs to be concerned with is whether or not the ECB has a bond ticket with your name on it. Period.
If you think this is bad, just wait – it’ll get worse. A lot worse. Why?
Do you think for one moment other central bankers are going to allow themselves to be out done via “The Full Monty?” I sincerely doubt it.
I wouldn’t be surprised if not only the BoJ, but the Fed. and others decide to reciprocate in kind and offer similar lunacy into their economic structures – soon. After all, it’s all made possible via decree and a keystroke. And what’s even more concerning?
Not only don’t they need to ask for permission. You can forget about them ever begging for forgiveness if, and when, this all blows up. As a matter of fact, if former officials give us any clue – they’ll demand you pay $250K for the privilege to hear them proclaim how they “saved the world” from economic collapse which they, more than any one else, helped facilitate.
And that alone is concerning enough.
© 2016 Mark St.Cyr