Since the ECB began the Public Sector Purchase Program (QE) in the middle of March 2015, it has purchased (through the end of November 2016) almost €1.2 trillion in securities from the financial sector. In addition to that, the central bank has bought €46.2 billion in corporate bonds, and €148 billion of covered bonds in a third iteration in that class. The whole transaction total is about €1.4 trillion of those three programs. We do have to consider the residual runoffs of prior balance sheet efforts, including the SMP and the prior two covered bond programs. Those are a net decline of €56.7 billion, bringing the total asset side to a net increase of around €1.33 trillion.

The other side of the ECB’s simple balance sheet is, essentially, the money side, or at least what is thought to be that. Over here is the deposit account and its NIRP, the current account of bank reserves, plus residual autonomous factors that include national government deposits of the various EuroSystem nations, as well as any contributions of the constituent National Central Banks. Since PSPP is conducted on the NCB level in order to shield the ECB from any potential repercussions of buying government bonds in those respective countries, we have to make an adjustment to figure out the net change for autonomous factors.
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After doing so, on the “money” side of the simple balance sheet there has been an increase of +€614.9 billion in the current account, +€388 billion in the deposit account despite an increasingly negative interest rate on it, and then +€275 billion in autonomous factors beside the PSPP. In short, we know where all the “money” in Europe has gone – basically nowhere.

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Instead, all this excess accounting has been languishing in what used to be money markets. The governing theory behind all these hundreds of billions (I won’t call them euros, because they are not) surmised that banks needed ample liquidity so as to be freed from fear of liquidity risk. That was the experiment of the LTRO’s crafted in late 2011; to flood the system with so much bank reserves that European banks would no longer pull back in lending and/or sell securities. It didn’t work.

Having “learned” from that experience, the ECB then decided should it flood the system again with bank reserves, as it did starting in later 2014, this time it would penalize banks for not doing something with those reserves. They still refused. As you can plainly observe, “money” rates simply follow those increasing “money” penalties – to the point of epic distortions.

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Prior to August 9, 2007, these unsecured money rates traded (mostly) at positive spreads to the repo-like Main Refi Rate (MRO) that used to count as the main monetary policy lever in Europe. Instead, even the 12-month Euribor, unsecured interbank lending at a term of 1-year, has fallen far below the rate of overnight ECB secured funding. Twelve-month Euribor is even now negative and getting more so by the week.

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To some economists and officials at the ECB this all perhaps makes some sense. To the real economy that doesn’t run like a puzzle of numbers on a spreadsheet, this is ludicrous. It hasn’t helped anywhere, including the banking sector itself. Banks in Europe overall continue to get smaller, while at the same time the real economy is stuck in the confusing rut of nothing but slightly positive numbers. Actual growth and meaningful improvement remain stubbornly elusive despite these hundreds of billions of so-called bank reserves that do nothing.

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Nowhere is that more evident than in Italy. The Italian banking sector is today (or at least as of the latest figures through the end of September) smaller than it was when QE’s first transactions were processed in March 2015. Total assets at Italian MFI’s have declined by €144.5 billion in the year and a half since, a long enough time period so as to be sufficient in drawing these conclusions. Total loans to the private sector are just €2.3 billion higher.

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At the same time, however, non-performing loan have greatly increased. Since the start of 2012 and the LTRO’s, Italian NPL’s are up by 85%, though it should be pointed out that bad debts have flat-lined on the balance sheets of MFI’s this year as Italy’s “bad bank” has “bought” some of the potential increase.

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In Italy, absolutely nothing is different. The economy continues to languish and despite the language and appearance of trillions the banking system remains as dysfunctional as ever. 

So the ECB actually has two problems simultaneously, the second of which it is responsible for in total. The first is as you see in the various unflattering and/or preposterous charts above; where despite the huge numbers on the ECB balance sheet and the impressive sounding size of QE and other transactions, they don’t actually do anything other create financial transactions that lead to more useless “reserves.” That all feeds into this second problem, which is perhaps more dangerous as it is one of perception that doesn’t appreciate (nor should it have to) the complexity and thus the full brunt of the ECB’s failure.

By that I mean popular opinion that recognizes what seems a huge disconnect; the people of Europe, as their compatriots in the US and elsewhere around the world, know very well that there hasn’t been any recovery despite almost ten years of increasing orthodox effort. Therefore, they easily understand the more tangible perception of monetary policy failure as one of the real economy, where clearly despite some positive numbers has meant nothing has changed.

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They see very plainly and easily, however, a financial system fraught with huge numbers of “euros”, leading many to question what all this “money printing” has been about. If it isn’t for Italians (or Germans, Greeks, or French) then it “must” have been for the benefit of the financial sector. After all, they see the surge in stock prices and hear about bond appreciation due, purportedly, to all the central bank buying and reasonably assume somebody is getting inappropriately rich off the schemes. You cannot blame their resentment, even if you understand that the ECB hasn’t benefited the banking system, either (only the brokerage functions have had it so good).

The result is this ongoing avalanche of political manifestation of frustration and anger. The “elites” of Europe do nothing different, yet the results as far as everyday Europeans are concerned don’t change. In many cases, economists in particular choose to highlight the positive numbers as if Europeans, as Americans, should just accept what little “growth” they get and be happy it’s not worse. This condescension has only continued to grate on the overall marginal electorate globally (except, apparently, Japan) to the point that if central bankers won’t change then the people will begin to force some kind of change through whatever political means are available, or might in the future become available.

That was Brexit, it was Trump, and now Italy. This weekend’s referendum in the Boot wasn’t a straight-forward populist revolt, as politics in Italy, as elsewhere, are more complicated than that. Overall, however, there was certainly a great deal of this economic/financial resentment fueling the victorious “NO” side.

Poll data showed the No vote was strongest in areas with high unemployment, in the relatively poor south and among young voters, pointing to a correlation with levels of discontent.

The error is one of politics; if politicians in all these places, including the US, continue to implicitly forbid actually different strategies for economic success then each body politick will increasingly appeal to more radical ways in order to find anything that might be different. To this point, the political upheaval has been by historical standards very mild. But history shows that it won’t remain that way, as stagnation and elongated depression after “enough” time surges parabolically toward that unknown in all kinds of directions.

The issue really is central banks, meaning central bankers. In Europe, it is more direct on that line. Central bankers never have to account for all these trillions, distortions, and then the inevitable and clear disappointment that follows each and every bit. They are insulated – at least until their persisting disaster leads popular revolt toward tearing everything down and everything apart. Mario Draghi has been held to no repercussions despite everything, but he certainly will have them if the EuroSystem and thus the euro is torn apart by the people’s choice.

Though this all could end up very positively, there are nontrivial risks that it turns decidedly unfavorable. In the search for political solutions due to the abject recalcitrant nature of the current elite power structure (socialism by central bank), we really don’t know in what direction political forces will turn. That endpoint risk might be most visible right now in Italy, where the technocrat government (oxymoron) is about to be toppled and replaced with perhaps an even more leftist set of arrangements. In the US, the populist disenchantment was channeled into Trump but also, we shouldn’t forget, the avowed Socialist Bernie Sanders.

As the leftist Guardian newspaper in the UK wrote in advance of Italy’s vote:

But for most people, it’s a plebiscite on the prime minister: whether he has done a good job or not. Renzi enjoyed high approval ratings when he first came to power in 2014, but voters are generally frustrated with him for a bunch of reasons, including high unemployment and concerns about the migration crisis. Voting against the referendum has become synonymous with sticking two fingers up at Rome.

In other words, the common theme around the world is economic, that the elites are being rejected because they have no actual answers, just the same untouchable opinion. As I have written many times the past few years, the recovery, the real one, not the fake one of “bank reserves” and the occasional positive numbers, will have to be political. Unfortunately, there really is no way to predict if that political search for actually different means ends up with that recovery or something much, much worse. The only thing for sure is that politicians have only themselves to blame for groveling so long at the feet of central banker theory and demanding so little accountability because of their impressive sounding credentials.

Economists can’t even make sense of money, but still they are given full range to make it all worse by at least continuing to stand in the way – for now.