The Swiss gold referendum: What it really means

In a few days the Swiss people will go to the polls to decide whether the Swiss central bank is to be required to hold 20% of its reserves in the form of gold

Polls show that the gold requirement is favored by the less well off and opposed by wealthy Swiss invested in stocks. These poll results provide new insight into the real reason for Quantitative Easing by the Federal Reserve and European Central Bank.

First, let’s examine the reasons for these class-based poll results. The view in Switzerland is that a gold backed Swiss franc would be more valuable, and a more valuable franc would increase the purchasing power of wage earners, thus reducing their living costs. For the wealthy stock owners, a stronger franc would reduce Swiss exports, and less exports would reduce stock prices and the wealth of the wealthy.

The vote is clearly a vote about income shares between the rich and the poor. The Swiss establishment opposes the gold-backed franc, as does Washington.

A few years ago the Swiss government, after experiencing a strong rise in the exchange value of the Swiss franc as a result of dollar and euro inflows seeking safety in the Swiss franc, decided to expand the Swiss money supply in line with the foreign currency inflows in order to stop the rise of the franc. The liquidity supplied by the central bank creating new francs has stopped the rise of the franc and supports exports and stock prices. As a vote in favor of a gold backed franc is not in the interest of the elite, it is unclear that the vote will be honest.

What does this tell us about the Federal Reserve’s policy of Quantitative Easing, which is an euphemism for printing an enormous amount of new dollars?

The official reason for QE is the Keynesian Phillips Curve claim that economic growth requires mild inflation of 2-3%. This false theory was put to death by the supply-side policy of the Reagan administration, but the misrepresentation of the Reagan administration’s policy by the Establishment has kept the bogus Phillips curve theory alive.

The claim based in disproven Phillips Curve theory that the Fed’s policy is directed at helping the overall economy is another example of the deception practiced by US authorities. The real purpose of QE is to drive up the wealth and income of the one percent by providing the liquidity that flows into financial asset prices such as stocks and bonds.

Since the 2008 US recession, skeptics of the Fed’s explanation of QE as support for the US economy have stressed instead that the purpose of US economic policy has been to support the federal deficit at low interest rate costs and to support the balance sheets of the troubled banks by pushing up the prices of debt-related derivatives on the banks balance sheets.

These have been important purposes, but it now appears that the main purpose has been to make the rich richer. This is why we have a stock market whose high values are not based in fundamentals but, instead, are based on the outpouring of liquidity by the Federal Reserve. As the economic policy of the US is entirely in the hands of the rich, it is not surprising that the rich use it to enrich themselves at the expense of everyone else. The Fed’s monetary policy that enriches the rich by driving up the prices of stocks and bonds also has robbed retirees of hundreds of billions of dollars, perhaps trillions, in lost interest income on their savings.

As I recently explained, QE is not over. The Fed is rolling over its interest and principal payments on its $4.5 trillion bond inventory into new bond purchases, and the banks now infused with $2.6 trillion in cash from the Fed are purchasing the bonds in place of the Fed’s QE purchases.

According to the latest news reports, Mario Draghi, the head of the European Central Bank will print all the money necessary to support financial asset prices. Draghi, like the Federal Reserve, masks his policy of enriching the rich in Phillips curve terms of driving up inflation in order to support economic growth. Of course, the real purpose is to drive up stock prices.

Like the Fed, the ECB pretends that the money it prints flows into the economy. But given the poor condition of the banks and potential borrowers loan volume is low. Instead the money created by central banks flows into paper financial asset prices. Thus, the monetary policy of the Western world is directed toward supporting the wealth of the rich and worsening the inequality in the distribution of income and wealth.

The rich are far from finished with their pillage. In exchange for campaign donations, state governors are turning over state pension funds to the management of high-fee, high-risk private pension fund managers who do a better job of maximizing their fee income than protecting the nest eggs of retirees.

Throughout the Western world economic policy is run for the sole benefit of the one percent and at the cost of everyone else. The greed and stupidity of the rich are creating ideal conditions for violent revolution. Karl Marx might yet triumph.

European Central Bank cuts interest rates to below zero

The European Central Bank
The European Central Bank

The European Central Bank cut interest rates to record lows on Thursday, imposing negative rates on its overnight depositors to cajole banks into lending more and to fight off the risk of Japan-like deflation.

The cut, the first time the ECB has deployed a negative deposit rate which effectively charges banks to deposit overnight, was a response to a slowdown in inflation far below the ECB’s target and to weak euro zone lending.

That is a combination that risks dragging the bloc into an economic quagmire.

The ECB lowered the deposit rate to -0.1 percent, meaning it will effectively charge banks for holding their money overnight. It cut its main refinancing rate to 0.15 percent, and the marginal lending rate – or emergency borrowing rate – to 0.40 percent.

Markets sent the euro EUR= to a four-month low of $1.3575 after the news.

“Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today,” the ECB said in a statement.

Investors first turn their attention to ECB President Mario Draghi’s 1230 GMT news conference at which he is widely expected to present other measures to complement the rate move.

“This is a baby rate cut – a tweak to the policy stance,” said RBS economist Richard Barwell, adding that Draghi needed to announce a bundle of measures to avoid disappointing markets.

Economists polled by Reuters had expected the ECB to cut the refinancing rate to 0.10 percent from 0.25 percent and the deposit rate to -0.10 percent from zero, as well as launching a refinancing operation aimed at funding firms.

Reuters reported last month that the ECB was preparing a package of policy options for this week’s meeting, including the rate cuts and targeted measures with a view to boosting lending to small- and mid-sized firms (SMEs).

“I think expectations are very high,” Barwell added. “To exceed them, I think he (Draghi) is going to have to talk up the prospect of asset purchases in the near future.”

Just hours before the ECB policy decision, a Bank of Japan policymaker sounded a warning, saying the euro zone should not take lightly the potential danger of slipping into a Japan-style deflationary period.

In an April 24 speech, Draghi set out three broad scenarios for ECB policy action and included the possibility of a broad-based asset-purchase program in the event of a worsening of the medium-term inflation outlook.

Such a program is unlikely for now, however, even though euro zone annual inflation unexpectedly slowed to 0.5 percent last month, figures published earlier this week showed. The ECB targets inflation of close to but below 2 percent.

Draghi will present updated inflation and growth projections from ECB staff at his news conference. In March, the forecasts showed it would take 2-1/2 years for inflation to get near the ECB’s target. A weaker outlook will support robust ECB action.

QE ON THE SHELF

The ECB is widely expected to accompany the rate cuts with other measures such as offering banks cheap, long-term funding – a so-called LTRO – on condition that they use this financing to further lending to companies.

Euro zone inflation has been stuck in what Draghi has called “the danger zone” below 1 percent since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries.

The stronger euro exchange rate exacerbates these dynamics.

At the same time, record low interest rates are still not feeding through evenly to companies across the currency bloc. Companies in Portugal, for example, are paying on average 5.4 percent on loans compared with 2.2 percent in Finland or France.

This particularly affects smaller companies, which rely strongly on bank funding and make up the bulk of the economy.

Another possibility is the for ECB to extend its provision of unlimited access to central bank funding beyond July 2015.

U.S.-style quantitative easing (QE) – money printing to buy assets – is likely to remain someway off, however, as it is the last weapon at the ECB’s disposal and the barriers to using it are high for the hawkish contingent on the Governing Council.

“We expect the big QE-bazooka to remain in the closet,” said ING economist Carsten Brzeski. – Reuters