Even at these historically low rates, don’t fix your mortgage. Interest rates are going lower. Renegotiate now if you can! Don’t take my word for it: listen to Mario Draghi.
The chief bottle washer of the ECB is worried, so worried in fact that he’s ready to print more money on top of the €1.1tn he’s already minted in the past year, in order to kick start the European economy. Interest rates in Europe fell again yesterday , not because Enda claimed that the Oglaigh na h’Eireann were ready to do some Latin American Junta-style head-kicking at the ATMs if the Euro money ran out, but because Draghi said he’d cut rates again.
On the face of it, Enda’s fear of widespread Euro-related unrest in 2011/12 and Mario’s fear of Euro-related deflation now seem unrelated. But they are not. They are inextricably linked. In truth, they are two sides of the same coin.
Despite the fact that the Euro seems much safer now and its existence is not immediately threatened, the underlying problems that nearly tore the Euro asunder, haven’t gone away. Indeed, you could argue that the problem has worsened, but they just have been masked by the ECB willingness to buy every IOU issued by every European government.
Back in 2011, the ECB was run by Mr Trichet who showed no understanding of either the severity of the crisis or the role of the central bank in easing it. As investors stopped lending to Eurozone governments, someone or some bank had to step in and lend – and that institution had to be the ECB.
As the crisis became more acute, Trichet was replaced by the pragmatic Draghi , who tore up the rule book and did what all Italians do in a crisis – he printed money.
This move caused all bond rates to fall because the ECB was now the buyer of last resort for everyone and everything. Falling bond rates are supposed to signal that risk has fallen, but is this actually the case in Europe?
Have the underlying factors that caused the 2011 Euro crisis actually dissipated or do they lurk under the surface?
Ironically, the Eurozone back then and still now, is faced with what could be described as a Trokia of problems – (1) not enough growth, (2) too much debt and (3) no political leadership.
It is now nearly four years since Draghi said he would do “whatever it takes” to save the Euro but still none of the fundamental problems have been solved. All the money printing hasn’t kick-started the Eurozone economy; rather than causing growth and inflation, the Eurozone is now facing deflation.
This deflation is leading to panic because the solution to too much debt is inflation not deflation. For the past four years, the ECB has got its inflation forecasts wrong, yes wrong. But in the unaccountable world of central banking, failure is rewarded and getting forecasts wrong doesn’t seem to matter.
Europe’s economy isn’t growing and it isn’t investing. The money that the ECB is printing is not going into productive investing which delivers growth. Instead, it is driving up asset prices, fueling financial speculation by the rich, which is causing greater inequality.
But why isn’t the European economy growing? Why aren’t European companies – some of whom have never been more profitable – investing right now?
This is where we have to go global to explain things.
While the average European mightn’t travel too much and especially not outside Europe, corporate Europe is hyper-global. Its worldwide footprint makes it highly sensitive to the global economy and the reluctance of Europe’s biggest companies to invest is a function of global conversations at board level.
Those conversations will start with the observation that demand in Europe is still very weak. America may be growing but is that enough when Japan hasn’t been right for a generation and the Chinese economy is facing a rapid post-boom contraction? Elsewhere, the big commodity-based emerging markets like Brazil, South Africa and Russia are simply derivatives of China as their wealth is largely a function of China’s demand for their raw materials.
So global aggregate demand is too soft to justify new large-scale investment. There isn’t enough aggregate demand in the rest of the world to make large corporations commit to investment. Remember that real investment tends to be in big machines that make big stuff.
This lack of demand is unfortunately coincident with a massive glut of supply. There’s over-capacity everywhere, particularly in China. Five years of hyper-investment in China has led to over-capacity in almost every major industry. How else can you explain slumping commodity prices and deflationary pressures everywhere?
Against such a background, can you imagine what would happen to the career prospects of a French steel executive who suggests to the CEO that they build a massive new plant to export steel to China?
The short-term implication of the Chinese investment boom is far too much supply in the global economy. All the heavy equipment that the world needs is already in China and this will take quite a while to use up. Corporate Europe faces a global supply chain – not a national supply chain – too much capacity in China actually means too much capacity in Europe. As a result, it would be wrong to expect a material pick-up in large-scale Europe business investment.
Without investment, income can’t rise.
When investment increases, demand increases, driving up wages and income. Ultimately, where do savings come from? Savings come from income, of course! Income is the font of savings. Without income you can’t possibly have savings and without investment you can’t raise income in any material way.
Therefore the ECB is stuck. It has used all its bullets and the problems haven’t gone away. Debts are still enormous, as deflation stalks, it becomes more difficult for people, governments and companies to pay their debts, because they can’t raise their prices or wages to cover their interest payments. So all the central bank can do is keep rates at zero for as long as it can.
This is what is happening, which is why you’d be mad to fix your mortgage just yet!
I think we all agree that Debt is the anchor around all our necks, it is why thousands of families are in financial distress, why small business is struggling to stay afloat, why financial institutions can’t advance credit,(not that that is remotely the answer) so it seems to me that Draghi’s QE is completely mistargeted, debt forgiveness is the dirty filthy term everyone runs a mile from but when do the lemmings come to the realisation that the cliff is looming, the ponzi has completely expanding too far, or has it? It seems to me that the will to deal… Read more »
Subscribe, it is only 8.50am here Mike!
Excellent summary David. These major, vital issues are bubbling away out of sight, outside of Ireland as Lehman’s was in 2006. It is outside the Irish coalition government’s control. As the road to an “early Spring” election is pitted with large numbers of destructive landmines, to blow up in Enda’s face, (* Homelessness, * Irish Water, * Hospital trolleys etc) perhaps now is the time for him to listen again to the wise words whispered in his ear recently and go very early. Labour is finished – a spent force. So as was shouted on the Titanic all those years… Read more »
David I read your articles because your track record is to call it as it is not as we might wish it to be. We had enough chancers and outright thieves trying to convince people to commit suicide or invest in property in Cape Verde (and not in any particular order) and various other bullshit get rich quick schemes during the Celtic disaster period. You and very few others called the bubble correctly and honestly when our gombeen culture rewarded hefty commissions to those who aligned themselves with the thieves. I don’t know you from Adam but that’s why I… Read more »
Excellent assessment of what is going on. I would add that in some Eurozone countries there is a public sector that does not perform. Ireland being a prime example. So these countries structure themselves politically so as to pretend that there is no problem with the elephant in the room. The principal achievement of the ILP in power (as the tail that wags the dog) has been to ensure that there was no serious reform ever occurring within the official “reform” program of the Irish state system. There has been no change in the Irish institutional state. That has been… Read more »
Everything that EK says is a distraction from the massive underperformance of FG/ILP in the running of the state system.
This is a facilitation of the ILP objective of shoring up the vote and being sweet to union politicians who really have no clue or interest in efficiency, or public service.
EK is a liar. And people are wising up to that.
This government is not serious about productivity, because it is not serious about debt.
David, your assessment is accurate except for one fact. You stated that “America may be growing but is that enough when Japan hasn’t been right for a generation and the Chinese economy is facing a rapid post-boom contraction?”
America is NOT growing either and is in no better shape than Europe. I urge you to check the facts on this and why Yellen and Fed are hog tied.
I’m trying to understand the scenario you describe – two sides of the same problem coin. Let’s see. You describe Mario’s fear of deflation as one side and Enda’s fear of a run on the Euro as the other. You merge the two problems into one by asserting that Enda’s fear is masked by Draghi’s commitment to “do whatever it takes” and buy “every IOU issued by every European government”. Now there is a buyer for just about any sovereign bond floated in the Eurozone. This amounts to fiscal funding by the ECB which is clearly a bad thing and… Read more »
Pat Flannery I absolutely trust that “we the people” will fix it. We the people have always had to fix it. We started that process of creative destruction and dissolved one major political party. We just need to continue with the job and dissolve the rest of them. Then we can start electing Independent public representatives accountable to us and elected to represent OUR interests. It’s in our history and DNA to do it. Who knows we may even grow a pair of balls like our forefathers and be prepared to fight for a decent future for our kids. But… Read more »
“Even at these historically low rates, don’t fix your mortgage. Interest rates are going lower. Renegotiate now if you can! Don’t take my word for it: listen to Mario Draghi” I thought there was a rant a few months ago about those scoundrels on tracker mortgages. I’m not sure that staying on a tracker is the best advice at this stage. Despite the central banks fixing the CB rates the bond markets and the mortgage markets are more closely aligned. Keep your eye on the bond market as fixed rate mortgages can move to higher rates while the tracker rates… Read more »
“Indeed, you could argue that the problem has worsened, but they just have been masked by the ECB willingness to buy every IOU issued by every European government.”
Indeed it is called monetizing the debt.
Overall the debt load is doubled since 2008. Nothing solved. Problems double what they were. Credit is maxed. Nothing but default to come and trillions of mythical wealth will be wiped out.
Then we shall see the “Unrest”.
http://davidstockmanscontracorner.com/the-central-bankers-death-wish/ “Indeed, the 2% inflation meme is so threadbare that it needs to be called out for what it is. It’s a convenient cover for the radical usurpation of power undertaken by the world’s central bankers during the last two decades. And it survives only because it serves the interest of Wall Street gamblers and the world’s politicians and fiscal authorities alike.” “In short, Europe, the US, Japan, China and most of the rest of the world is in thrall to a tiny coterie of power-hungry central bankers. If you do not think they are driving the financial system to… Read more »
Tony Brogan I’m against centralized control of all institutions and systems Tony. I think they become a menace to civilisation over time. However much sharper minds than mine have made the case against centralization and I think most sensible people instinctively grasp the logic of it without worrying about grand theories. Nassim Nicholas Taleb makes very compelling arguments about the dangers of worshipping science in general and economics specifically in books such as Antifragile. Taleb views most of what passes for economic theory as bad maths or outright falsification and he uses the Long Term Capital Management scandal as a… Read more »
France and Germany have mortgage products with 25yr fixed rates@ 2.75% Repayments would be 1,153euro/mth for 250,000euro mortgage or 923euro for a 200,000euro mortgage. This amount is less than 25% of take home pay for an average industrial wage couple joint earnings of 75,000euro gross. In the old days 3.5 times one earner was the metric with the average first time buyer being 28 yrs of age. Now at 7 times one earner with the average age being 36yrs of age. On Sean O Rourkes radio show(22nd oct) Tom Parlon considers pushing out the metric to 9 times one earner(for… Read more »
Interest rates at the current percent are below the inflastion rate if the inflation is correctly calculated.
governments continue to spend more than revenue and encourage people to spend more than they earn. This disastrous behavior is obscured by the inflation which robs us all but makes debts easier to service with inflated currency. All is well until economic slowdown cause unemployment and wage growth to stagnate. Then debt becomes a problem. We are reaching the end days of such behavior as inflation squeezes the capability of people to pay.
http://www.econmatters.com/2015/10/the-inflation-lie.html
http://www.jsmineset.com/2015/10/23/jims-mailbox-1759/ Jim’s Mailbox Posted October 23rd, 2015 at 2:21 PM (CST) by Jim Sinclair & filed under Jim’s Mailbox. Jim, Does Money Supply include all the below? -Equity investments -Bond investments -Credit investments -Derivative investments If not, if it is only cash and deposits held in banks (and those are slowly being eliminated), then wouldn’t it be impossible to track the velocity and supply of money in order to judge inflationary pressures? It seems all money is being diverted into risk assets. Is true money supply, as an indicator, dead? CIGA Wolfgang Rech Dear Wolfgang, This is a complex item… Read more »
http://www.jsmineset.com/2015/10/21/a-saturated-world/ Talking about resetting a mortgage rate reminds me that the world is awash in debt. In fact, so much debt that it cannot be serviced at the current economic output. Simply stated the debt payments exceed total income. What is a central bank to do to reinflate the economy except lower interest rates and add liquidity by the exponential production of more money. Thus we have ever lower interest rates that only now have the option of being negative by larger and larger amounts. That is paying people , institutions to borrow in the hope they will spend. All… Read more »
There are lots of housing available for under 100,000. Place your bid here.
http://brggibsonauctions.com/properties.asp?Auction=B
We have full market regulation now of the asset markets.
The whole thing is nonsense. Marxism for Millionaires is nonsense. Asset price bubbles.
Particularly evident in the IT sector.
Cost Benefit Analysis question for David. Could David tell us if the domestic economy and Irish bank customers are better off with the present take it or leave it 2% higher interest rates with “bad will” and total mistrust of todays Irish (same 2007) bankers ? or Slower return on the 25 bn euro so called pillar bank shares But 25yr fixed mortgages@ 2.75% . Restructures for families with overvalued mortgages to replace firesales. Consumer confidence with Real Value Debt and a clear vision for families to plan their futures. Are the 25bn euro pillar bank shares worth the feeling… Read more »
Hi, “Europe’s economy isn’t growing and it isn’t investing. The money that the ECB is printing is not going into productive investing which delivers growth. Instead, it is driving up asset prices, fuelling financial speculation by the rich, which is causing greater inequality. But why isn’t the European economy growing? Why aren’t European companies – some of whom have never been more profitable – investing right now?” A very courageous article especially from a Keynesian because you are grasping the nettle that too much debt is the problem. The above excerpt highlights your sometimes error of over thinking the problem.… Read more »
Ron Paul says there is plenty of inflation and the middle class is being destroyed.
https://www.youtube.com/watch?v=qZwkWuMSERY
As the US backs off the new Russia steps forward.
http://www.zerohedge.com/news/2015-10-26/russias-mid-east-takeover-continues-afghanistan-requests-military-assistance-moscow
Very interesting article in the Guardian which articulates and reflects what some of you guys have been saying recently. He suggests that the UK Government is deliberately promoting a housing boom so that homeowners/private sector take on more debt to facilitate a reduction in Government to reduce it’s own debt. Surely the Irish Government wouldn’t be doing that – again!!
Peter
http://www.theguardian.com/commentisfree/2015/oct/28/2008-crash-government-economic-growth-budgetary-surplus
Would be great if they just distributed money to all the citizens of Europe instead of giving to the banks.
The EU covers over 4 million km² and has 503 million inhabitants
Give €20,000 to every man/ woman and child. That’s €1 trillion.
Imagine if everyone in Europe was given €20k. It’s sickening to see Draghi give to banks and corporations. With €60k, I could set up a business, (that’s my funding goal at them moment), instead it goes to banks and reckless governments.
I came across a recent Sunday Times article (25.10.15) regarding Credit Unions which might have a bearing on the discussion above. Credit Unions are currently restricted from lending where the terms exceed 10 years. They’d like to get into the mortgage business. There’s clearly a market for a new entrant because Pepper Finance have indicated that they may enter the Irish market in 2016. If Credit Unions were permitted surely this would provide Irish consumers access to mortgage finance with a (relatively) clean part of the financial system which got through the Celtic disaster in reasonably good shape? This may… Read more »
Michael Noonan is a major holder of so called private bank(when it comes to salary increases)shares.
He also hit post office saving bonds.
There is a multiplier effect on the damage being done to the domestic economy from diverting every ounce of spare cashflow from consumers into his banks.
I wouldnt be surprised if its bankers that tell us when the next general election is.
They unbelieveably seem to run the muppet show.
mike flannelly Well it was a rhetorical question Mike. Who loses in this scenario,who gains and whose interests are being served? The Irish Credit Union system was anti-fragile during the meltdown, a few failed but there was no systemic risk. They were decentralized in a similar way to Swiss domestic banks so there was relatively little contagion. The reforms have now made them more “professional” and “efficient” (and ring fenced their assets for a bail-in if required) but have made them much more fragile to another shock. It’s like a flotilla of fishing boats in a perfect storm,some sunk but… Read more »
In todays Irish Independent David tells us that the great expectations of land owners for future price increases is the driving force behind todays property crisis. Next week David is going to meet with the institute of professional auctioneers and valuers to discuss a novel system of valuing property that may be imposed on Irish Banks soon. Overvalued property was NOT the problem. The problem that destroyed the domestic economy and the lives of Irish families was ” Grossly Overvalued Debt” which was multiples of best practice metrics. Auctioneers did a brilliant job for the seller and achieved the highest… Read more »
Getting rid of the national debt is as simple as issuing debt free money directly from the government which is used to pay off the debt. An example posited here by Ellen Brown, for the US, is worth a read for anyone interested.
http://www.truthdig.com/report/item/how_obama_could_beat_the_debt_ceiling_and_go_out_a_hero_20151028