“Herr Draghi is not Mephistopheles”. Word of Herr Peter Feldman, social democratic mayor of Frankfurt, the first Jewish burgomaster since 1933, when the burgmeister Ludwig Landman was expelled from the city council by the advent of Nazism. But what does Draghi have to do with Mephistopheles? And why is the mayor of Frankfurt talking about it? Thursday afternoon, in Frankfurt, there was the solemn ceremony for the roofing of the GrossMarktHalle, in the presence of the mayor and the governors of the central banks of the euro countries: an enormous building in the late Expressionist style which, during the 1941th century, it was used as a fruit and vegetable market except for a tragic parenthesis, between 1944 and 1999, in which the Nazis used it as a collection point for Jews to be sent to the camps. In the XNUMXs it seemed destined for demolition but, in XNUMX, the noble fathers of Europe wanted the central bank to have a headquarters worthy of its historical mission. But Frankfurt, as we know, is home to the no less powerful German central bank, the Bundesbank, which this year wanted to celebrate Wolfgang Goethe, the noblest son of this land, with an exhibition on the relationship between the master of German literature and the money. Which brings us back to Faust and Mario Draghi.
The president of the Buba, Jens Weidmann, at the opening of the exhibition declared that the purchases of the ECB in favor of the most indebted countries are comparable to the advice of Mephistopheles in Faust. Draghi, who missed the Frankfurt ceremony, did not respond. The mayor, on behalf of Germany which does not recognize itself in the Bundesbank, yes. But, beyond the literary metaphor, how to interpret this Faustian comparison in an Italian key? A less abstract theme than it appears at first glance, as Alessandro Fugnoli explains in his weekly note of "il Rosso e il Nero" on the website of Kairos, an independent asset management company founded and led by Paolo Basilico.
“Faust's Mephistopheles opposes the emperor and all the men of the Kingdom united by the thought of never having enough money – claims Kairos' strategist – with the ingenious intuition of paper money. Among the excited murmurs of the courtiers the devil explains that there is no need to guarantee the new money with the gold already mined. If someone asks for guarantees, they will be shown the land and told to dig. There are infinite treasures underground." But Goethe ends the monetary adventure suggested by Mephisto very badly, in inflation and ruin.
Is Weidman right? It's easy to say no, also because it is well known that the ECB will move in favor of Spain only in the face of precise and demanding (perhaps too much) conditions. Furthermore, the Bank will sterilize its purchases of Spanish securities or those of other countries with the sale of securities already in the portfolio for the same amount. So there should be no net money creation and therefore no significant inflationary push. But, underlines Fugnoli, the Bundesbank's trench was in any case "broken through" by the decisions of the Fed.
“Over the next two years, the Fed will create two new trillion dollars. He hasn't said it officially, but he has hinted that from January, between Treasuries and mortgages, he will buy at least 120 billion of securities a month with new money. It will continue until unemployment is down to 7%. Since it will take almost two years to achieve this goal, everyone immediately did the math and came to the two trillion. If the Fed creates money, the dollar weakens, while the euro, yen, renminbi and pound strengthen. To avoid a revaluation that no one wants, Europe, Japan, China and the UK will have to do exactly what the Fed will do, that is, they will create all the money needed to balance the money created by the Fed. Japan has already set to work. The ECB, to formally respect what little remains of the Bundesbank's theological principles, will not create money in the relaxed way of the Fed, but will follow a more tortuous path. In the first phase, it will buy bonds in Spain and Italy as soon as they request it. But this will not be enough. In fact, Italy will try to resist until after the elections without asking for aid and it will probably succeed. Spain, which will likely capitulate soon, will need no more than 200 or 300 billion and in any case will oppose larger amounts".
So how is the ECB going to catch up with the Fed? “You will do it by resorting to other Ltros, or by giving more money to the banks so that they can buy more government bonds or, who knows, increase loans. In total, the balance sheet of the central banks of developed countries, equal to two and a half billion before the crisis, will reach 15 billion in two and a half years. Nothing like it has ever been seen in history.
It will end up good or bad, no one knows. Central banks swear it will end well and to some extent they sincerely believe it. Ex ante they are probably right. The unused resources (unemployed, idle plants) are still very large and inflation, in the next two years, will not cause serious problems.
In these matters, usually, the devil doesn't put his tail in the beginning, but in the end, when the recovery is well underway and unemployment has finally fallen to more tolerable levels. Central banks, mind you, have all the tools to reabsorb excess liquidity in time. The problem is that it is the politicians, exactly at that moment, who block central banks because you never know, there could always be a fallout and it is better to remain ultra-expansive for a while longer”.
Then another work by Goethe will be topical again: the Sorcerer's Apprentice (remember Fantasia by Walt Disney?). The magician goes away and the young cleaner of the studio tries to create a broom that cleans itself with a spell taken from the master's notes. At the beginning everything goes well, but when the job is done the apprentice no longer knows how to stop the broom, which he begins to combine with all colors, until the master returns to put it back in his place. “In our reality the opposite happens. The apprentice (central banks) knows how to get out of the spell and it is the magician (politics) who risks preventing him from doing so”.
The summary for the investor? “Whether it ends well or badly, the next two years, and 2013 in particular, will have to be used by investors to bring home as much as possible. It makes no sense to sell your soul to the devil in exchange for so many beautiful things and then not enjoy them while they exist. It's like going into debt to loan sharks to buy a Ferrari and never use it. Even (especially) those who believe that one day we will suffer the eternal damnation of inflation should avoid spending the years of waiting surrounding themselves with very sad Bunds. Better to carouse with BTPs and Bonos and occasionally venture (with due precautions) into the red light district and be seduced by Spanish regional bonds (Catalonia yields 12 per cent, for those entitled to request a refund of the withholding tax ) or even Greek. It is the central banks that ask us for it”.
