Gold News

Whatever It Takes? You Mean a Recession?

Crash of the bumblebee, 10 years on...
PITY poor Mario Draghi, writes Adrian Ash at BullionVault.
The man who saved the Euro by vowing to do "whatever it takes" 10 years ago this week has now been thrown out of power as Prime Minister in the currency union's 3rd largest economy Italy...
...opening the door to anti-Euro politicians led by the Brothers of Italy...
...just as the cost of Italy's region-leading government debt jumps yet again relative to the costs faced by Europe's No.1 economy, Germany...
...and just as the now 19-nation currency zone gets whacked by the worst inflation since the early 1980s, long before the Euro project became reality 2 decades later.
Chart of Eurozone inflation (red) and Italy vs. Germany 10-year bond yields. Source: BullionVault
"People said many years ago, the Euro is like a bumblebee," Draghi told a conference in London on 26 July 2012, back when he was President of the European Central Bank.
"This is a mystery of nature, because it shouldn't fly but instead it does. So the Euro was a bumblebee that flew very well for several years."
An odd if not desperate metaphor, perhaps. But then the 5 years to summer 2012 has been a very stressful time for central bankers everywhere, with the stress now landing most of all on the Eurozone. And you can see how Mario's metaphor sort of worked on our chart above.
The Euro had enjoyed a smooth if only briefly happy flight from 2002...when national currencies vanished and the Euro became money across the currency union's member states...until the global debt bubble burst and flipping into a global credit crunch in 2007.
Inflation had been stable, eating the value of cash-in-your-hand by around 2% per year, right in line with the ECB's target.
Government borrowing costs were also benign, pretty much aligned between Berlin and Rome...
...(Italy paid just 1/5th of a percentage point more per year than Germany on average from 2002 to 2007)... well as between Lisbon, Dublin, Athens, Madrid and the rest too.
But then came the surge in energy costs (aka the commodity supercycle). It was fuelled by a cheap-money bubble pumped up amid the very same low inflation and happy credit spreads which kept the impossible Euro air-borne and which also poured investment cash out of the region's rich trade-surplus North into the sunnier, cheaper-priced South. 
Inflation of course turned all this upside down.
Cue central banks everywhere to raise interest rates. Cue a collapse in the cheap-money bubble. Cue an explosion in credit spreads. Cue the Greek debt crisis, and cue the very real risk of Spain or even Italy being edged out...or choosing to exit...from the Eurozone project, as those rich Northern investors suddenly wanted their money back from the poorer Southern economies.
"Probably," Draghi went on 10 years ago Tuesday, "there was something in the atmosphere, in the air, that made the bumblebee fly.
"Now something must have changed in the air...after the financial crisis. The bumblebee would have to graduate to a real bee. And that's what it's doing."
Like I say, these were stressful times. But while Draghi's bumblebee metaphor may feel forgivable, his claim that the bumblebee was evolving into something which could fly all by itself really wasn't.
Chart of European Central Bank deposit interest rate and balance-sheet. Sources: St.Louis Fed and
"When people talk about the fragility of the Euro," Draghi said in that infamous speech of July 2012, "[they] underestimate the amount of political capital that is being invested in the Euro.
"I do not think we [at the European Central Bank] are unbiased observers [but] we think the Euro is irreversible. And it's not an empty word now...
"[So] within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough."
At first, those 3 words...
...Whatever. It. Takes...
...failed to put a summer breeze beneath the bumblebee's wings.
Instead, it only helped to weaken the Euro further on the FX market while boosting the price of gold...the ultimate rebuke to central bankers trying to make the world work as they wish, rather than how it is.
So two weeks later, Super Mario had to come clean, stop it with the metaphors, and explain that "Whatever it takes" meant creating money with no limit, and spending it all on government debt from Euro member states facing trouble raising new loans or refinancing what they already owed in the bond market.
That promise did the trick, because merely vowing to go nuts with massive QE bond buying saw the Euro find a floor in the currency markets, while interest-rate spreads became narrower in the Euro-government bond market...
...and gold priced in Euros peaked 3 weeks later. It wouldn't get back there for another 7 years.
Behold the triumph of central banking, albeit with Greece locked into a crushing recession by punitive debt repayments and austerity, and then Cyprus hit by exchange controls to protect its banks and government (and therefore rescue their overseas creditors, of course) while Germany got locked into underwriting the whole thing (even if it was all, well, a little bit illegal).
Mario's words alone couldn't keep this uplift running for the Euro bumblebee however. Instead, the central bank really did have to resort to limitless QE bond buying. It also slashed overnight interest rates below zero in mid-2014, desperate to keep inflation from slipping into deflation and making the region's Southern government debt pile gain value in real terms.
Here in 2022, the ECB has got that dream come true. Inflation has never been higher since 2 decades before the single currency zone came into being. So guess what?
Cue central banks everywhere to raise interest rates. Cue a collapse in the latest cheap-money bubble. Cue an explosion in credit spreads. Cue a new Eurozone debt crisis, only this time with No.3 economy Italy very squarely in the frame.
It's not just the Eurozone facing big trouble either. Rising rates, plus the monster inflation they are aimed at curing, have got more Americans more scared about inflation than even during the Covid Catastrophe or global financial crisis.
Chart of US resident searches on Google for "recession" (100 = peak volume)
Last month, a YouGov poll in the USA found that 58% of Americans feel the economy is already in a recession.
Only 19% disagreed.
The bond market is also pointing towards a recession if not quite guaranteeing it just yet.
That's because, for now, the outlook for much steeper interest rates (such as this week's looming hike from the US Fed) won't quite take very short-term bond yields above longer-term rates. Not quite. Not yet.
But if that happens? Meaning when?
An inversion of 3-month Treasury bill rates above 10-year Treasury bond yields has presaged every US recession of the last 5 decades. It hasn't given a false signal since 1966. And maybe it is exactly what central banks want.
"A mild recession is probably pretty good from the Fed's point of view, given the situation we're in and how bad it looks," says former US Fed governor Laurance Meyer.
"In order to bring inflation down," agrees Austrian central-bank chief and ECB voting member Robert Holzmann, "you might have to accept a slight recession."
Got that?
Look, central banks can't do anything to end Russia's war on Ukraine. Nor can they do anything to ease the post-Covid supply-chain glitches causing product delays and surging costs either.
So to cap the overall pace of inflation, their best hope is to push down prices outside of those areas...
...destroying domestic demand in, say, the services sector by hiking the cost of borrowing.
"We hope that won't be necessary," says Holzmann.
But "we will go as far as necessary to ensure that inflation stabilises at our 2% target," said his ECB boss Christine Lagarde last month.
Whatever it takes? Hard to believe she's serious.
Last week the ECB raised Euro deposit rates from minus 0.5% up to...oh wow! in the face of 8.6% annual inflation.
But this "front-loading" of policy rate rises "will support the return of inflation to our medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver our inflation target in the medium term," Lagarde claimed last Thursday.
Ensuring. Demand. Conditions. Adjust.
Not quite "whatever it takes". But then suggesting you want to provoke a recession is more controversial today even than trying to rescue over-stretched debtors a decade ago. And that's also something which Lagarde and her team want to achieve as well. They're just as coy about it as they are about recession.
"On Italy, we are seeing yields rising with the political uncertainty at centre stage," said a journalist at last Thursday's ECB press conference.
"What's your message to the market?"
"Very confused," came the answer, if not in so many words.
The ECB has given itself a new facility which means that...even while it halts new QE money creation and bond buying as it raises interest can also create new money and buy bonds at will.
"Under this Transmission Protection Instrument, all members of the Euro area can be eligible," said Lagarde. "All of them."
So that means Italy?
"The Governing Council, in its discretion, in its assessment, will determine on the basis of the eligibility criteria, on the basis of the indicators that will signal or not unwarranted, disorderly market dynamics, whether or not a country is eligible and whether it activates the TPI. Voilà."
Got it? Voilà.
Other journalists tried to press the point, asking a further 3 times whether Italy was about to get emergency TPI QE to rescue its government bond market ahead of September's snap election, when the anti-Euro Brothers of Italy look set to come first but lack a majority.
Not once was the country named by Lagarde or Luis de Guindos, her vice-president. And they were only a little less shy about the economic impact of their interest-rate rises.
"Under [our] baseline scenario there is no recession, neither this year nor next year. [But] is the horizon clouded? Of course it is."
Whatever it takes? Yeah, well, like, whatever.
Central banks were the wind beneath the wings of the financial markets and global economy during the financial crisis. They blew hard at keeping things afloat during Covid as well, aided by record-heavy government borrowing and stimulus.
So a decade on from Draghi's dramatic vow, the scope and size of monetary policy now run way beyond anything investors could have imagined in July 2012.
What it will take to rein in those powers, and leave the economy to fly or crash by itself, is anyone's guess.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals