It’s been a long time since I posted, but I thought the news from the eurozone today was worth highlighting, especially since the media seems determined to ignore what it means.
The European Central Bank (ECB) today announced that it was willing to purchase government bonds in the Eurozone, something which until now it had refused to do.
From the BBC:
The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.
Mr Draghi said the ECB would engage in outright monetary transactions, or OMTs, to address “severe distortions” in government bond markets based on “unfounded fears”.
While it does include some criticism from the German Bundesbank, the overall tone of the article (and the linked blog by Stephanie Flanders), is “about time too!” But there is no honesty about what this plan actually means. Nor the fact that this seems to violate the ECB’s own constitution, which forbids the outright purchase of government bonds.
To understand what is actually happening, we need to turn to ZeroHedge. This new programme is nothing more than creating new money out of thin air in order to fund the continued existence of governments who have repeated failed to fund themselves with real money.
The fact that the ECB announced that there is no limit to these bond purchases means there is no limit to the amount of new money it is willing to create in order to save the euro.
The only problem, is that by trying to save the euro, the ECB could well destroy it:
And here is the biggest irony: by doing everything in its power to keep yields artificially low and markets artificially high, the ECB is removing any urgency by Spain, Italy, Greece, actually scratch Greece, and all other countries with unsustainable primary and other deficits, to fix their problems. Which is of course perfectly understandable: why should politicians risk their careers with socially unpalatable deleveraging (please don’t call it austerity) programs when they can just continue doing what they do, keep getting reelected, and hope and pray that the ECB will punish all those bond vigilantes who understand that this particular game will not have a happy ending.
In other words, in 3, 6, 12 months, all economic indicators in Europe will again deteriorate, budget deficits will be greater, and economic viability will be even more hindered, but at least the stock markets of the world will be at all time highs, and hedge funds will avoid one more quarter of redemption requests, even as every country is careening toward disaster. Because unless Spanish, and soon Italian depositors, reverse the outflow of their money from local insolvent banks and into the core of the Eurozone, then today’s ECB action has achieved absolutely nothing. In that sense: all Draghi is desperately trying to do is restore confidence in these two fulcrum countries. He can only succeed if he generates enough inflation to ‘inflate’ away the trillions in bad debt held by domestic banks. However, in the process he will also set off the great inflationary firestorm that sees Germany shift from “9” to ‘auf wiedersehen’, not to mention Brent in EUR to all time records, coupled with a food price crisis.
It is this that the Bundesbank is lamenting: the ever greater trade off of meaningless short-term market gains in exchange for long-term broad collapse and potentially hyperinflation. Sadly, nobody else is, or will be until not even all the world’s central banks can control the fate of the bond and stock markets any longe.
When governments have to resort to the printing press, you know they’ve run out of ideas – and credibility.
The ECB is simply catching up with the Fed and the Bank of England, who have been using the printing press for the past few years, as the chart below shows (thanks to Coyote Blog):
In case you’re wondering, Lehman Brothers were leveraged at a ratio of 31:1 before they collapsed. The world’s central banks are playing a very dangerous game.