Euros, Gold and the FT’s Person of the Year

“Who suffers most from inflation? Who suffers most from rising prices? It’s the poor, not the rich. The rich can protect themselves from inflation; poor people can’t.”

— Jean-Claude Trichet, head of the European Central Bank (ECB)

THE FINANCIAL TIMES CHOSE JEAN-CLAUDE TRICHET — head of the European Central Bank (ECB) — as its 2007 Person of the Year.

OK, so Time magazine had to settle for Vladimir Putin — the former KGB spook now rehearsing his puppeteer skills at the Kremlin. But was the FT’s shortlist really that bad? Couldn’t Lindsay Lohan clear a space in her party schedule to claim the award instead?

At least the inebriated actress delivered as promised last year, denting only good taste in the process. Monsieur Trichet’s inflated celebrity, on the other hand, now threatens to cost the world dearly.


Trichet’s No.1 task as president of the ECB is supposed to be delivering “price stability” to the 320 million citizens of the eurozone (Malta and Greek-speaking Cyprus joined the fun on New Year’s Day).

Put another way, his 2% inflation target means €1.00 of living expenses today should cost no more than €1.02 by this time next year. But anyone shopping in euros last Christmas, however, found the cost of living 3.1% higher on average than in December 2006 — or so says the Eurostat agency.

Europe’s festive inflation outran even November’s seven-year record. It came close to undoing almost 14 years of inflation fighting by the ECB and its pre-euro ancestors. And things had been going so well too!

For 2007 as a whole, consumer price inflation in Europe averaged 2.14%. But curiously, that’s exactly the rate it hit in September, before racing higher as Christmas drew nigh. What changed in the summer of Trichet’s star year? “One of his strengths is his ability to manage a crisis — he enjoys that,” says Olivier Garnier, adviser to the ECB chief in his former life at the French Treasury in the early 1990s. And by golly, but Trichet got a crisis to relish this summer!

Relaxing in the sleepy French fishing port of Saint-Malo, Jean-Claude Trichet awoke one August morning to find “the first financial market crisis fought by BlackBerry from the beach” surging across the Atlantic toward him, gushes the Financial Times.

“As the ripple effects of the collapsing U.S. subprime mortgage market caused global finance to seize up, the ECB announced it would unilaterally pump in unlimited overnight liquidity: In the end, it added almost €95 billion ($136 billion, £69 billion)…

“Initial shock at this unexpectedly radical intervention gave way to admiration of [the ECB’s] steady hand,” the newspaper goes on, hardly able to contain its praise.

“As the drama unfolded, the ECB appeared to be setting the pace among central banks. In the ultimate compliment, the venerable U.S. Federal Reserve and the Bank of England copied the tactics of an institution not yet 10 years old.”

Hurrah for Trichet! Three cheers for unlimited liquidity! Hosing Paris and Frankfurt with overnight loans, Monsieur Trichet secured his place in history as “one of the few to emerge from the turmoil with his reputation enhanced,” the FT declares. He certainly helped save the blushes of BNP Paribas, proximate cause of the interbank lending panic when it suspended three investment funds on Aug. 9 after the “complete evaporation of liquidity” in the subprime U.S. mortgage bond market.

But our brave little pompier actually hosed so much cash into Europe’s money market, he’s since felt the need to mop up the puddle 14 times in the last 14 weeks, draining a total of €390 billion in Christmas week alone.

In the 456 weeks between the ECB’s birth and October, by contrast, the bank drained “excess” liquidity from Europe’s money market only a total of 21 times, offering government bonds in exchange for cash.

It’s a pity, in fact, that Monsieur Trichet didn’t think to take a couple of euros out of the market before last summer’s turmoil began…


Under the European Bank’s first president, Wim Duisenberg, the ECB’s open-market liquidity auctions averaged €64.6 billion. Since “Tricky” Trichet took over on Nov. 1, 2003, that’s more than trebled to €204 billion.

Indeed, our chart seems to show how the real hosing came to end when the world’s money markets froze back in August. But the number of ECB auctions helped pick up the pace, reaching 7.8 on average per month, versus 5.5 averaged per month during the preceding eight years. The average value, meanwhile, has risen to €136 billion, from €130 billion between 1999-2007.

Was this flood of short-term liquidity really needed to help save the world’s financial system? Funnily enough, said Trichet himself to the European Parliament on Dec. 19, “There has been little evidence that the financial market turbulence since early August 2007 has strongly influenced the dynamics of broad money and credit aggregates.

“Indeed, the expansion of loans to households and nonfinancial corporations has remained robust, which may suggest that the supply of credit has not been impaired.”

No fooling, Jean-Claude!


Controlling growth of the money supply is supposed to make up one half of the ECB’s policy tool kit. Indeed, capping the number of monetary units in circulation used to be the “first pillar” of the grand anti-inflation stance it adopted at the dawn of Christendom’s third millennium.

But the idea of actually using Bundesbank-style discipline to deliver German-style low inflation soon lost out to watching “broad economic data” instead. Now playing second fiddle to what Wolfgang Munchau of the Financial Times tellingly calls “the real-world view” of economic growth, consumer prices, and trade-weighted exchange rates, the ECB’s initial money-supply target — under which the broad M3 measure of liquidity would grow by no more than 4.5% per year — has quietly slipped from the ECB’s speeches, press releases, and official statements.

Unloved and unmentioned, it’s come to look like some ridiculous ex-spouse…still bent on sending a Valentine’s card each year but using his left hand to scrawl “Guess who…?” Since the euro became flesh at the start of 2000, however, actual growth in Western Europe’s money supply has outpaced the “reference value” by more than one-third. It met or fell below that target for barely 10 months.

And right now, the quantity of euros in circulation — both physical and digital — is growing at a pace 2 1/2 times faster than the ECB’s initial prescription, taking the eurozone back to the runaway credit inflation of the late 1970s.


No wonder, then, that “At a global level, the risks for [price] inflation are on the upside,” as Monsieur Trichet told the Bank for International Settlements (BIS) in Basel, Switzerland, on Jan. 7.

No wonder, either, that the gold price in euros has exploded as a result. The citizens of France, Germany, and Italy saw the gold market scoot higher toward €600 per ounce as Monsieur Trichet’s year of 2007 reached its end.

Will his policies at the ECB cap inflation — and stall the surging value of gold prices — in 2008? Here at BullionVault, we think a fireman hosing a burning house with kerosene would have a greater chance of saving the furniture.

“There is a danger of second-round effects on headline inflation,” as the FT’s Person of the Year told the BIS. Perhaps he was thinking of Berthold Huber — head of Germany’s IG Metall union — promising his members “a mega year” for pay awards, starting with demands for an 8% increase in the steel sector.

Or maybe Jean-Claude Trichet was thinking of the six public sector unions now threatening to strike over higher wages and pensions in his homeland, France…or the failure of above-inflation pay awards in Italy’s public sector to prevent fresh strikes this month…or maybe the current wage talks in Spain, where annual pay awards are still linked to inflation — which is currently running at 4.1% from this time last year.

In Germany, even the very poorest workers — those who “suffer most from inflation,” according to Trichet himself in an interview with EuroNews last year — have come to expect an inflation-beating pay raise this year. The Social Democratic Party is pushing for a minimum wage of €7.50 per hour (some $11) in the world’s third largest single economy. Sharing power with Angela Merkel’s Christian Democrats in her “grand coalition,” the SDP might just force the issue too.

Several big unions, however, are pushing for an even greater “second-round effect” of the ECB’s failed inflation busting, worth a massive €11 per hour (more than $16).

In short, “There is no room for complacency [on inflation],” as Monsieur Trichet, a former member of France’s militant PSU party, told his audience in Basel. But what else beyond complacency would explain the surging M3 money supply…now growing fast enough to match the surging rate of monetary expansion in the United States and not far behind the wanton inflation of Britain and China?

It’s the poor — and the poor middle classes, especially pensioners on fixed incomes — who pay most when money loses its value. Top earners, led by Europe’s hottest financial hotshots in Frankfurt and La Defense, can look after themselves.

Not least with a flood of central bank money so great, it needs mopping up by the very firemen themselves!

So for all the good he’s done defending the value of euros, Trichet may seem a weird choice for 2007 Person of the Year. But for saying one thing and doing another…and for helping the forces of inflation to mass, even as he claimed to stand firm against them…he has corralled the spirit of our financial age better than even Ben Bernanke at the U.S. Federal Reserve.

Jean-Claude Trichet, we salute you. Truly, you are the man of the moment!

Adrian Ash
January 23, 2008

The Daily Reckoning