Yesterday morning I watched, with a quite bit of amusement and disbelief, clips from the press conference President of the ECB Christine Lagarde held Thursday, which I had no time to watch live. My amusement arose from two sources.
First, President Lagarde used a modified quote from a highy respected and a truly strong (woman) leader Margaret Thatcher, by stating that “this lady is not for tapering”. PM Thatcher used the original quote “this lady is not for turning”, in her speech in a Conservative Party Conference in October 1980, to underline that she will not make an U-turn in her policies of economic liberalization of the UK despite of the pressure.
The policies of PM Thatcher were all about liberalization and economic freedom. The policy line she choose effectively lifted Britain from its deep economic slump. She went against those who wanted to keep the big role of state in the economy and strong labour unions, which were the main reasons for the malaise of British economy. Essentially, she went againts the consensus in her party and even voters. She was a pioneer and a leader in a class we rarely see.
Now, President Lagarde is using the same quote to defend bigger influence of the ECB in the markets or the consensus. Practically, she could not have corrupted the original meaning of phrase of PM Thatcher more.
Secondly, madam Lagarde used the quote to underline that she is not tapering, but just shrinking the size of the Pandemic Emergency Purchase Program (PEPP). I don’t know what she has been “smoking”, but this is exactly what ‘tapering’ means, that is, the diminution of the asset purchases of a central bank. You can check the meaning of tapering from Brookings Institute or from the statements of former Chairman of the Federal Reserve Ben Bernanke.
Effectively, madam Lagarde was conducting a propaganda operation, where something (tapering) was presented as something else (not-tapering). In common tongue, it was a lie. Unfortunately, this is nothing new among modern central bankers. For example, in October 2019, following the bailout of the repo-markets, Fed Chair Jerome Powell dupped the asset purchase program enacted by the Fed as “not-QE”.
The difference, allegedly, was that while in QE, the Fed buys U.S. Treasury bonds with maturities from 1 year up, in the “not-QE” the Fed bought Treasury bonds with maturity less than one year (i.e. Treasury bills). It was naturally just a load of horse manure, but they desperately tried to give an appearance that the Fed could shrink its balance sheet without collapsing the financial markets. This, unsurprisingly, did not succeed and the near-collapse of the repo-markets in mid-September 2019 was the final nail to this fallacy.
Madam Lagarde’s misquote and propaganda operation gives a disturbing view on the ‘trap’ central bankers have driven themselves into.
Central bankers, like M. Lagarde, are mortally afraid to say or do anything that would upset the markets possible (likely) causing them to collapse from their over-levered state, which central bankers themselves helped to create. For example, it’s very unlikely that the bubble in the sovereign bond markets the ECB has created, would be able to sustain a true tapering not to mention the rise in interest rates or the shrinking of the balance sheet of the ECB (or quantitative tightening).
However, inflation has painted central bankers into a corner, like I/we been warning. The ECB, and madam Lagarde, are trapped.