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Monday, January 26, 2015 12:17 PM

Dutch Central Bank President Cites "Financial Bubbles", Voices Strong Opposition to QE in TV Interview; Death by 1,000 Pin Pricks

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Mario Draghi has strong opposition to his QE program from two sources: German central bank president Jens Weidmann and Dutch central Bank president Klaas Knot.

In a television interview on Sunday, Dutch Central Bank Head Says He Doesn’t Support ECB Bond Purchases.

Mr. Knot, who sits on the ECB’s Governing Council, said in an interview on Dutch television that he wasn’t convinced of the “necessity and effectiveness” of the program, known as quantitative easing. “Even if you believe it worked [in the U.S.], you cannot project its alleged success onto the eurozone,” he said on the talk show “Buitenhof.”

Email from Bruno de Haas

I got the above story from Bruno de Haas, head of policy & research at a medium-sized Dutch pension fund and author of a book arguing that the Netherlands should leave the euro.

De Hass Writes ...

Hi Mish,

This Sunday morning the president of the Dutch central bank, Klaas Knot, was interviewed on Dutch television. In my view he made some remarkable comments on the main topic, namely the ECB’s decision to embark on QE.

Knot was very candid. He explained that he had not supported the decision because he thinks it is neither necessary nor effective. He doesn’t think it is necessary because there is no deflation in the eurozone once you strip out the effects of the lower oil price.

With regard to effectiveness, he doesn’t expect that buying sovereign bonds from banks will increase credit by banks. He does expect that “using the printing press” (a phrase he literally used) will result in higher stock prices and more expensive real estate, further inflating what he called a “bubble on financial markets”.

According to Knot asset prices already are far detached from the real economy, and although this situation may last a while, there will be a moment when the two will converge again.

In contrast to the US, where a wealth effect could be expected from inflating asset prices, Knot doesn’t find a positive wealth effect likely in the eurozone. The main reason is that most people have their assets in pension funds and insurers, and their solvency ratio decline because the negative impact of a lower interest rate on the mark-to-market value of their liabilities overshadows any gains in the solvency ratio from higher asset prices. This is indeed the case in the Netherlands where the two largest pension funds will have a funding gap at the end of January because of the low yield curve.

The only way that QE might support growth in the eurozone, Knot said, is through a devaluation of the euro, but he expects that to be a temporary effect. With respect to the position of Bundesbank-president Weidman he made it clear that they were in agreement on this. However, not all northern eurozone central bank president had voted against QE, Knot said. The Finnish president voted in favour.

I hope you find this of interest.

Bruno de Haas
Death by 1,000 Pin Pricks

I could not find much in English by de Haas. However, I did find a translation of a news article about him worthy of note.

Please consider "The Euro is Death by a Thousand Pinpricks"
Economist Bruno Haas pulls no punches in a Dutch financial newspaper article. According to Haas, the euro is a speeding train that runs straight into the abyss.

Haas knows whereof he speaks. He was involved in the drafting of the Maastricht Treaty and the department that oversees financial stability for the Dutch Ministry of Finance.

According to Haas, the EU's desperate attempts to pump more money into the rescue of the euro will fail. Moreover, these attempts will be at the expense of both the southern and northern European countries.

Naive Dream

The idea of ​​one large currency union among diverse economies, according to De Haas is an increasingly a naive dream. To break out of the downward spiral in the eurozone, De Haas believes the project needs to be shut down.

"Continuation of the euro project is costing us billions. It's death at the hands of a thousand pinpricks," said the economist.
Rational Arguments

Add Dutch central Bank president Klaas Knot to the list of those saying the right things for the right reasons.

Prince Michael: Prince Michael of Liechtenstein Warns "QE a Sign of Helplessness, Will Not Reach Economy"; Prince Michael vs. Martin Wolf

Mervyn King: More QE will not help the world.

Steen Jakobsen: "Lower Interest Rates May Reduce Consumption". Michael Pettis at China Financial Markets and Lacy Hunt at Hoisington Management both agreed.

Grand Experiment Failure

I wrote about Steen's theory in Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph, a rebuttal to Bloomberg author Barry Ritholtz, also in favor of massive QE.

Note that the rationale of Dutch central Bank president Klaas Knot is nearly the same as that of Steen Jakobsen and Michael Pettis.

The only thing QE can possibly do is create bigger bubbles. When they crash, what then?

Mike "Mish" Shedlock

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