Mario Draghi got a straight A grade from Janet Yellen as quoted in a Wall Street Journal interview (Source: Wall Street Journal, February 12, 2021):“Whatever it takes will go down in the annals of central banking history as the most important interventions ever. It’s hard to imagine where we would be without it”.
Indeed, an un-elected technocrat with the power of the printing press behind him has now made history as the appointed, unelected Prime Minister of Italy. Yellen, making her own history, is the first female Treasury Secretary of the United States (which is always an un-elected position). Central banks and central bankers have always been political institutions with subterranean political ambitions, and now they have discovered that one shortcut to the helm of the country is to give elected officials who have the power to appoint them what they want – buckets of free money under the now respectable practice of unlimited money printing. They have the world’s economies so dependent on their power to print money that they will, in all likelihood, begin to control governments and their policies, without having to be voted in. Monetary policy has conclusively overflowed into fiscal and political philosophy, and its ramifications for asset prices and portfolios are immense. Move aside Wall Street – retired central bankers now aim for the Palazzo Chigi or more. There is also a competition ready to erupt between Bitcoin, the “elected” digital currency of its network of users, and “appointed” digital currency, known as CDBC (Central Bank Digital Currency), which will likely be quite consequential for investors.
To catch up readers on the context: Just a few years ago it seemed like Italy was going to have to default, and as the third largest economy in Europe, this event would result in an inevitable implosion of the European Union. In a now famous gunslinger speech, Draghi, then the President of the European Central Bank (ECB), told investors around the world that the ECB would not let this happen, and reversed the course of history that his descendants at the ECB in particular and the rest of the world of central banking have equated with the second coming of a “monetary messiah”.
In short, Draghi convinced the world that the central bank possessed the will and the ability to do as it pleases, despite the objections of the frugal German members of the ECB – both in terms of money printing, buying up assets, and re-distributing this wealth. The acts of the US Federal Reserve in 2020 (Powell’s “crossing of red lines”), and of others is a rerun of the Draghi resolve, and convinced a cadre of central bankers to the point that now money printing, credit extension, and buying of assets is considered not only normal, but expected. New, Herculean, perpetual motion machines with uncontested powers have been found, and to cite Draghi once more, “believe me”, they are being used.
The ECB has bought up multiples of the net supply of both sovereign and corporate bonds in Europe. Functionally bankrupt countries can issue bonds at negative yields, and even corporations who possess the option to default can sell their debt to the ECB at prices that mean a certain loss for the ECB if held to maturity. Banks in Europe can borrow at more negative yields than the loss that they incur from placing reserves at a negative yield with the ECB, miraculously turning two negatives into a positive. But the bond market-driven re-distribution in Europe is probably…