Language itself being imprecise, it is often difficult to assign terminology that exactly fits the circumstances or processes being described. So often convention thinks and writes and speaks of monetarisms as if they were drugs like speed or heroin; the efficacious inducement toward uninhibited recklessness. Thus, “markets” are the addicts that only perform in the presence of the intoxicant. This is just wrong, however, because it affords monetary policy a direct influence it simply does not possess.

In the past, I have attempted to semantically wrangle with this kind of declaration, giving over instead toward anesthesia rather than some “stimulant.” The effect, in at least some places, is that central bank efforts at best induce investors to forget about the fundamental pain of the atrocious background that called for such medication in the first place. While that may be closer to the effect, it still attributes an active and direct process to the monetary injection.

With Mario Draghi and the ECB undertaking yet more kabuki today, I think it easier to prove that orthodox monetarism is but a placebo; it does absolutely nothing but so many think it does and believe in it that it produces some effects and a great many that are unintended. While that may be closer to the most apt description, it still may fall short as writing analogies for abstractions will always be imprecise, especially when the placebo itself falls under the potential for alteration.

A simple examination of all the relevant and pertinent numbers declares this evidence. Since March, the ECB has “bought” €445 billion in whatever securities under the PSPP (QE) and an additional €138 billion under the third go at covered bonds (bank’s that buy their own liabilities, debt collateralized by internal loan pools, only to sell their own liabilities that they now own to the ECB; this is capitalism?). For that nearly €600 billion condensed into less than three-quarters of a year, inflation is still basically zero and overall lending is lower now than when QE, at least, started.

ABOOK Dec 2014 ECB Lending TotalABOOK Dec 2014 ECB Lending Private

Taking lending first, lending to households and non-financial corporations is slightly higher since March but that may be as much inertia as anything else; the destruction in lending, the trough, ended in 2013 and overall has just been drifting ever since. In fact, despite the small increase recently, lending to the private sector, the real economy, is down a little from January 2014 and quite a lot from the 2011 peak (-€440 billion). In fact, lending to the real economy peaked in September 2011 at the open outbreak of what was a wholesale funding fiasco sparked not just from the euro but also “dollars.”

Since that point, the ECB has tried almost everything (there probably is another level of debasement that has already been discussed, maybe in the realm of BoJ-type fruitlessness) and nothing has worked – but a great deal of people, including and especially in the media, have contemporaneously attributed all that monetarism great power and influence (in future tense) anyway. It is continuously referred to as “stimulus” without any observable influence afterward. The only direct trace of the recent QE, though, has been contained completely within the financial sector itself. Clearly financial firms were borrowing and attaining leverage in order to take advantage of what was sure to be an insider profit opportunity of yet another central bank throwing around otherwise inert monetary units at whatever price.

ABOOK Dec 2014 ECB Lending Finls Other

Not surprisingly, gifting financial gains to other financial participants has not sparked a continental renaissance. That is also true of everything else the ECB has done which, despite mainstream suggestions this year (monetarism in the past tense), has been quite exhaustive. Everything that has been said and written about QE was said and written about the LTRO’s in early 2012. At about €1 trillion, they weren’t some minor detail or footnote in that period’s crisis; it was the same kind of “overwhelming” monetary show of force that is attributed to QE now. And like what we see of QE already, it had no practical effect in either lending, as shown above, or “inflation” which is what all this monetary fuss is supposed to be about.

The idea of central bank efforts revolves around the concept of “money printing”, and thus that is where the heroin and speed analogies derive their meaning. The ECB created monetary units, just as the Federal Reserve or Bank of Japan did, but they just sat there – inert and useless. This non-money printing money printing was even supplemented, as always, by interest rate monkeying that is believed to be almost equivalent inside this medical analogy. That has meant, starting in June last year, right around the moment where the “dollar” started its destructive “rise”, even a negative deposit rate floor. The sum total of all these efforts has been nothing:

ABOOK Dec 2014 ECB Inflation

European “inflation” since September 2011, unsurprisingly, has been falling steadily if unevenly with the usual monthly variations here and there. Again, there is no discernable correlation between “money printing” and inflation just as there has been none in related lending (aside from the internal financial front-running).

ABOOK Dec 2014 ECB Inflation QE CBPP3

We can even further refine and narrow the focus of this placebo. European money markets hold if not direct impact from ECB efforts than the closest to it that will be found. In other words, the way the rate corridor works offers an interaction between bank “reserves”, the inert byproducts of the PSPP, CPBB3 and whatever else the ECB invents to make people think it is printing money, and various monetary offers. The deposit rate, for instance, opens a riskless choice for interbank balances – no bank will lend at Eonia, the overnight, unsecured interbank rate, less than the deposit rate because there is no risk with the ECB where there is some small, marginal risk even at Eonia (in theory; in practice Eonia is only carried out among the largest banks themselves).

From even that establishment of the money markets, you would expect a hierarchy of risk to follow. If the deposit rate defines the riskless floor, as the ECB intends, then farther maturities should be defined by discrete positive spreads which add time risk. The age of QE, however, just like then in the LTRO’s, has all but destroyed that hierarchy. Back in July, 1-week Euribor began trading below even Eonia; a cross that extinguished at least one ultra-short risk premium. More recently, that negative spread has grown and it has widened down the curve. Given the current trajectories, 3-month Euribor should before long be trading at a negative spread to Eonia; the overnight rate should not be less (and less negative at that) than the 3-month rate.

ABOOK Dec 2014 ECB Interbank CorridorABOOK Dec 2014 ECB Interbank

This appears to be, since Eonia applies mostly to the largest participants, very much like what QE in the US did to finish off any relevance in the overnight federal funds market. And so the ECB has killed off one part of the money markets in order to further infect and infest more and more. The reason, monetarily speaking, is again the placebo; to compress spreads so that it appears to be “less risk” in money markets so that banks will suddenly decide to lend, lend and lend which will foster inflation, inflation and inflation. There works through, theoretically, further trade-off factors, where a bank should be wholly repulsed by a negative time premium in money markets so that they have “no choice” but to do something productive with the liability (money in wholesale banking is a liability; liabilities are used to create assets, the ECB merely wants to shift that usage from a money market asset to a loan asset).

ABOOK Dec 2014 ECB Interbank Eonia Euribor 1WABOOK Dec 2014 ECB Interbank Eonia Euribor 3M

And so I believe we have located our placebo – the money markets themselves. The ECB is using them to make it appear as it has taken to enormous “money printing”, so much that it destroys(ed) regular functionary determinations. How powerful must that money printing be to accomplish highly negative money rates with more than fully compressed time spreads? Aside from how that sounds, it really isn’t by count of what is cataloged above and any unbiased reading of Europe’s ongoing economic difficulties. European money markets are the canard, the great monetary lie behind it all – central banks just don’t have a printing press. They create ledgered numbers and alter “money” market behavior, but there is no money anywhere to be found.

The reversal of wholesale markets, more than just in the euro denomination, isn’t the heroin addict falling into the crash awaiting another fix, it is the steady realization that markets have been taking the placebo all along. There was never any monetary reduction in risk inhibition, only self-inhibition was affected by imprecise determinations about what a central bank actually does and that, in the end, it is bank balance sheets that determine almost everything of debt and credit importance (actual capitalism is another story). A “more negative” deposit rate is as it sounds, ridiculous as offering Europe a higher dose of the same placebo.  That the ECB would resort to this is not a projection of power and determination, but a further show of irrelevance and desperation.

Even though I think the analogy is perhaps the best of a narrow range of choices, it still falls short especially in the money markets themselves. A placebo effect implies at least neutrality; in the money markets that just isn’t the case. While they might be the dummy palliative for the rest of the financialized system thereafter, function within it is assuredly becoming worse for the trouble. Further, we have no idea what that even means because this has never truly occurred before. If even Alan Greenspan was slightly concerned about actual function around the zero lower bound, nobody has any idea what about well below it. The only direct observation is that it still doesn’t work in the same way everything before it didn’t.