In the past few days, financial markets have become obsessed with whether or not the central banks of the world will cut interest rates, and print more and more money. This obsession was obviously heightened by the comments of ECB president Mario Draghi last week, when he said he would do “anything” necessary to save the euro.
“Anything” was taken to mean that the ECB would buy the bonds of Spain, and possibly Italy, directly. In short, it would do what the Germans feared most: monetise sovereign debt simply by printing money to buy the IOUs of peripheral governments. As a result, traders thought that they had been given a type of insurance policy because they knew the ECB would buy bonds of countries like Spain and Italy. This pattern is not new.
Over the past year, every time there is a word from a central banker about cutting interest rates, the financial markets rally. This is what has come to be known in the market as the ‘risk on’ trade. In other words, the trader can take risky positions if the central bank is behind him. The risk is ‘on’.
If the central banks don’t deliver, the financial markets sell off. This is known as the ‘risk off’ trade.
We are getting to a stage where the financial markets are now addicted to the central banks’ infusion of money. But we are also in the position that the central bankers are looking over their shoulders at the reaction of the markets all the time. If the markets sell off, the expectation is that the central bankers will react and the expectations are heightened which, in turn, has the effect of backing the central bankers into a corner, as Draghi saw last week.
Draghi said he would do “anything” to save the euro. Then he did absolutely nothing, bar a ham-fisted press conference last Thursday which made things worse. Now the crisis in Spain and Italy has been exacerbated by inaction. And we start the game again at lower prices and higher bond yields.
This game of cat-and-mouse has come to dominate the eurozone landscape. But it’s not fixing anything because, all the while, the euro – or at least the operation of the euro in different countries – has become more and more dysfunctional. Member countries face vastly different interest rates – a situation which can’t go on.
What is the point of a central bank of a currency zone that can’t set interest rates in that zone properly?
But due to the political nature of the project, it looks like the euro will limp on with totally different monetary conditions in the various parts of the union. These will amplify the recessions in the periphery and could well lead to, wait for it, property bubbles in the core. Yes, property bubbles.
The prospect of a property bubble in the core fuelled by incredibly low interest rates should make us consider the point of all this central bank credit, and whether it is a viable long-term solution. As a short-term tactic, it may make sense in a crisis, but longer-term rising asset prices – whether they be real estate, bonds or stocks – can only be sustainable if the underlying economy generates a robust growth rate, which in turn drives profits.
Can this be achieved by the central banks printing money? In other words, can central banks eliminate risk? And if central banks can eliminate risk at will, then what’s all the fuss about?
The idea behind the markets’ central bank obsession must be that printing money can obviate market risk. It cannot.
Consider what is happening in Europe now. There are two primary reasons we’re seeing so much attention focused on the Draghi debt monetisation ‘solution’ to the economic crisis.
The first is that austerity doesn’t work. It makes an economy shrink, and therefore undermines that economy’s capacity to service its debt. Spain is a very good example of this right now, as is Greece. All over the periphery, each time an economy splutters because of cutbacks, the reaction of finance ministers is to promise deeper cuts. This reinforces the crisis, growth stalls and default risk rises, propelling bond yields higher.
The second reason for stubbornly high bond yields is that policy-makers are refusing to countenance default. This default option burns bondholders, but is much more effective at getting economies back on their feet again. The reason it is more effective in getting the economy back motoring is that, after a default, new capital is no longer sucked into subsidising old mistakes, as is the case now.
Because of austerity, which isn’t working, and the “there’ll be no default” position (with the exception of Greece), there is only one solution to the European debt crisis – and that is to print more and more money, buying up more and more debt directly.
However, such a policy of opening up the balance sheet of the ECB directly puts the ECB on a collision course with the Bundesbank, its most important constituent member. The Bundesbank believes that central banks can’t obviate risk. In fact, the German view is that, the more money that is printed now, the more risk is built into the system in the guise of potential inflation.
It also believes that all this money will need to find a new speculative home, which in Germany looks likely to be a property bubble. The Financial Times recently reported that a house in Munich which cost €3 million six years ago, changed hands last month for just over €6 million. Remind you of somewhere?
If Draghi wants to preserve the euro, urging governments to stick with austerity while not countenancing some sort of default in Spain, he will have to buy peripheral bonds. This sets him directly against the Germans.
The reason he backed down last Thursday, and didn’t do what he had promised, was because he couldn’t bring the Germans with him. The markets, which are used to instant gratification, sold off – and the risk trade is off.
Over the next few weeks, we are going to see a battle for the heart and soul of the euro, in which there can only be one winner. Who said central banks could eliminate risk?
The Markets, Financial Institutions etc.etc.etc. right down to joe soap, are succumbing to the idea, like everyone else in this global financial mess that if they “react” – then nobody wins!
So David, you are not going for the conspiracy theories, you seem to agree more with the greedy voter – stupid politician explanation.
This article is very much in line with this one from Stratfor. The angle they chose was the inability for today’s investors to adapt to the “new” political intrusion in economic affairs, forgetting that this was the norm up until the 1990’s. They view the interference of Germany in the European affairs as non condusive to investment making because these decisions are too unpredicatble. The article explains that in fact, the econony and the politics have always been inter-dependent and the last 20 years were a blip in the usual norm, they just forgot about it. It goes on to… Read more »
When Draghi said he would do “anything to save the Euro” what he really meant is he would do anything to save the banking system. As an ex Goldman Sachs man his main goal is to look after the banking elites and stuff everyone else. There is too much debt throughout the EU. This debt was handed out willy nilly in the early 2000’s to all the periphery countries without proper due diligence to see if they could ever pay it back. Well they can’t and the only solutions are either outright default or restructuring. Everything else is just avoiding… Read more »
+1 Cooldude
David it looks like you are back on the kool aid.
Draghi is a bullshitter who has links with many elite
organisations – bilderberg etc blah blah blah.
His raison d’etre is to institute the subjugation of the nation states of europe to an unaccountable unelected
group of people who seek control over our lives and futures.
“Super” Mario is another.
All of these people have form David which you seem incapable of understanding or making the links.
Konfewsion I think if we read my caption it tells something without trying to make myself clear enough.The respondents are trying to hack it for us as this is a message in David’s article . Confusion will REIGN for the rest of this month .It will be significant more than ever before . And WHY ? BLUE Moon WOBBLE commences on 15th August and will continue for rest of month and will peak on 23rd August ( MARK IT )…….and Explodes on 31st ….. Merkle is a Cancerian . To understand her better watch movies of Myrrl Streep ….Devil Wears… Read more »
…Brussels edging towards the inevitable ?
http://www.marketwatch.com/story/eurogroups-juncker-says-greek-exit-manageable-2012-08-07?link=MW_latest_news
Who gets stuck with the bill ?
The working people. Not the banks.
“Europe” will not punish the banks. If the people are being ignored, it is inevitable that they will be abused and deceived. The people have been ignored for twenty years. And deceit follows.
We can expect some new terminology…there will not be a “default”…instead a “financial reassessment”…
The Draghi Docrine….Print-Baby-Print.
subscribe.
I predict a riot; but schools out for summer and their is no one to organise the riots, but maybe when rag week comes around someone in the students union will organise a riot, lads it will be bit of crack we can get loads Buckfast it great gear, it’s their right of passage… Fat cats don’t hunt; I just can’t see it, I just can’t imagine the Irish people storming the Bastille to protest over having no Coco to sprinkle on their shinny Latte; What are protesting about now! Enda, they say they have no coco, well Gilmore give… Read more »
Zerohedge makes an assessment about Germany…
http://www.zerohedge.com/contributed/2012-08-06/german-economy-caves-and-eurozone-bailouts-take-new-dimension
Zerohedge reckon that the German economy is contracting. Despite the ECB’s low interest rate policy which was supposed to whip up a real estate euphoria to bring in taxes to help bail out the mess the ECB created with low interest rates in the last decade…..
So Super Marion Draghi promised financial nuclear Wunderwaffen, or Bazooka as The Economist like to call it, from the Bunker, and as usual lost. This time around the bluster fizzled.
Now the German Constitutional Court is out for deliberations, with perhaps an injunction ruling in September, and a final ruling in 2013.
I think pundits now have to wait. I’m amused at the rising blood pressure.
Notwithstanding that really insane “philosophers”, Habermas et all, are penning incredible tracts about the stability of the Euro.
Time for a jolly laugh!
Outlawing the gambling in currencies would go some way to solve some of the problems, the financial, so called markets,are totally non productive.
Translation Markets are obsessed with the word of God Almighty and one word from God Almighty affects everyone God Almighty will do as he pleases and hang the consequences and when he snaps his royal fingers the loyal herd veers course fast like unthinking slaves. This is why he is God Almighty and economists are his slaves Yes David. You are a slave of your own ‘success’. Haw haw. But maybe the truth is that all economists are personal failures and know it deep down inside where I am authentic and true to my spirit. The rest of us can… Read more »
Tongue in cheek for all you big balled Paddy marauding capitalists
Oh, wheel of fortune
I’m hoping somehow
If you’ll ever smile on me
Please let it be now
http://www.youtube.com/watch?v=JgELNz5YDUs
With Politicians Like Germany’s Soeder, Europe Is Certain To Head for a Real Disaster Typical of the worsening political situation in Europe, where leading politicians go at each other’s throat as the euro system becomes more and more untenable, is Markus Soeder, Finance Minister of Bavaria, who in a newspaper interview today rightly denounced ECB President Mario Draghi’s plans to resume purchases of sovereign bonds from troubled states. But Soeder’s presumed alternative to Draghi, is merciless austerity conditions and paying of the debt for debtor states: Over the Aug. 4-5 weekend, Soeder attacked the Greek government, saying that b the… Read more »
Italy’s Bailouter Monti Considers Parliaments an Obstacle In an interview with Germany’s {Der Spiegel}, Italian Prime Minister Mario Monti says he “can understand that they [governments] must show consideration for their parliament. But at the end of the day, every country in the European Union has a parliament as well as a constitutional court. And of course each government must be oriented according to decisions made by parliament. But every government also has a duty to educate parliament. If I had stuck to the guidelines of my parliament in an entirely mechanical way, then I wouldn’t even have been able… Read more »
Reports of a housing bubble starting have appeared in Germany, with Regensburg singled out. All the signs are there. Funny how each bubble is claimed as our very own bubble, by each state trampled on by a berserker financial system?
Like a traffic victim saying those tire tracks over him are his very own personal property!
In general, the difference between coincidence and causality is that coincidence has no intention. Personally, I do not subscribe to probabilistic explanations, even chaos is deterministic in some ways, and of course, there is also synchronicity, but this would likely go too far here in the realm of a blog comment. I am just very sceptic on the principle of “coincidence” and find it an unsatisfactory explanation. In context, the markets act with intentions, the events that unfolded 2007-2012 were highly predictable in many ways. Ultimately it is intentional social engineering and the markets are the means to achieve this.… Read more »
“What is the point of a central bank of a currency zone that can’t set interest rates in that zone properly?” i would ask the question. Why have a central bank artificially setting interest rates that are differnent to those suggested by the market place. such rates are causing such large distotions in the ecomony that it is doomed to disaster. it is what the federal reserve is doing, what every other CB is doing until it is a joke. But no laughing matter. Better to leave the market to set the rates and then we have to get on… Read more »
…the story of the Stiglitz commission underlines the responsibility of western media to undertake more independent investigation rather than parrot the views of representatives of western states as their own.
http://mondediplo.com/2012/08/09un
Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible.“When, through process of law, the common people lose their homes, they will become more docile and more easily governed through the strong arm of the government applied by a central power of wealth under leading financiers.“These truths are well known among our principal men, who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system, we can get them to expend their energies in fighting for questions… Read more »
Bubblesbubblesbubblesbubbles……!
not really much more to say,same debate different day.
nothing changes
Watch out as budget 2012 strips us further.you have been warned.
peace,goodwill & happiness to all you folk.
RRRRRRRR66666666666
Hi David, You got it right. The thing that has to give is us the people and that is more of our salaries. The Taoiseach responded to a statement in the Dail recently that 2m people in the state have only 100 euro left at the end of the month to spend and 1m have nothing by saying he still had to get 3.5bn out of the economy (internal). That’s 200m of a float. Not nearly enough. So where is the 3.3bn gonna come from? Ans: 1.8m people still working in the state say average salary 30k PA is total… Read more »
Reading an interesting book by Norbert Elias on the process of civilizing (Genesis of the Naval Profession)and you can see how we moved from Feudalism to what we have now because it was the only way a Monarchy could survive against an increasingly powerful set of Noblemen. Survival usually means ensuring no one group gets too powerful to take you out. Fast forward to the 21st century. The new groups are now – Government (Monarchy), Professionals (Lawyers, Doctors, Civil Servants – aka technocrats), Media and Bankers (all are the Nobility) who lord over working classes & highly in-organised middle classes)… Read more »
‘But due to the political nature of the project, it looks like the euro will limp on with totally different monetary conditions in the various parts of the union.’ This is a very important statement in the article because it’s the first time I am aware that David has contrasted his view on economic matters with the real politic of the system as it stands. You really are lifting heavy weights now David. This article re highlights what you said before. The bonds markets have decoupled from the economy rising or falling based on their interpretation of whether the bailout… Read more »
Sorry, I can not get a link without requiring you to sign up a subscription!! Jeff Neilson echos my recent posts on the effects of the central banking cabal The Toulouse-Lautrec Table World Markets Topic du Jour ——————————————————————————– Crime of the Millennium Jeff Nielson As few people in our societies even know, all of the world’s governments have (foolishly) granted exclusive monopolies for the printing of all the world’s currencies (our “money”) to a cabal of privately-owned corporations called “central banks” — given that name because it is a cabal exclusively owned/operated by bankers. Understand that the monopoly to print… Read more »
http://www.monbiot.com/2012/07/30/scorched-earth-economics/
In today’s world, a handful of people have enormous wealth, influence and freedom, while the vast majority are burdened with debt, labour and poverty; with little or no say in world affairs. This imbalance is clearly unfair and can no longer just be accepted as normal. Millions of people every year are born into a life of poverty and starvation, even though we have the resources and technology to feed and shelter everybody if we want to. Wasteful manufacturing drives an insatiable appetite for limited natural resources like oil, copper, gold etc. Since these scarce resources are only found in… Read more »
off topic but unteresting
http://www.zerohedge.com/news/guest-post-another-example-why-central-planning-bad-idea#comments
I wonder how would our lads have coped not that they will ever get the chance.
Monti’s Attack posted above at http://www.davidmcwilliams.ie/2012/08/07/somethings-gotta-give/comment-page-1#comment-121306 on Parliaments Draws Prominent Criticism in Austria and Germany Aug. 8, 2012 (EIRNS)–In a harshly-worded statement issued in Vienna yesterday, Ewald Podgorschek, financial policy spokesman of the Freedom Party of Austria (FPOE), denounced Mario Monti’s disrespectful remarks on national parliaments, in a newspaper interview, as an attack on democracy. The division of power, giving parliaments political control over governments, is a core aspect of democracy; therefore, Monti’s remarks have to be rejected in the most categoric terms, Podgorschek said, adding that one may pose the question of whether Monti’s loyalty still is more with… Read more »
With Enda and Noonan’s “medicine” will Irelands economy go this way? Italian Economy Plunges Under Rigor Montis Aug. 8, 2012 –Monti’s policy, “Rigor Montis”, is plunging Italy deep into depression, but Monti goes on unchallenged, with more destruction. Industrial production has plunged 8.2 percent on a yearly basis (June ’12/June ’11), and 1.4 percent from May to June 2012. GDP has plunged 0.7 percent from Q1 to Q2 and 2.5 percent on a yearly basis. Monti has not flinched. He stated to the Wall Street Journal that, had he not replaced Berlusconi, the spread between Italian and German bonds would… Read more »
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“The first is that austerity doesn’t work.” When an individual spends what he does not own he is in debt (or a robber and thief) for what was borrowed. Tomorrows earning have already been spent. In order to repay that debt the individual must make a sacrifice out of current income and live on the balance. Is that austerity? If the individual is prudent and frugel then a lifestyle is lived within means and no debt occurs. A form of self imposed austerity takes place rather than the mandatory austerity imposed by the creditor. It seems to me that is… Read more »
China knows that gold is the ultimate money and financial resource. The state is accumulating and encouring the population to privately by gold too.
http://www.usagold.com/cpmforum/2012/08/08/chinas-strategy-on-gold/
http://www.usagold.com/cpmforum/2012/08/08/chinas-golden-people/
““Practice,” he says, “has proved that private gold reserves is an effective complement to national reserves, is very important for maintaining the country’s financial security.” Can you imagine an American or European economic policy-maker telling the citizenry to purchase gold as a “favorable opportunity” and characterizing private gold ownership as essential to “the country’s financial security?”
More and more people are thinking strategically about gold. Owning physical gold should not be viewed as a way to make money. Rather, it is way of saving capital that creates optionality for future spending power and investment resources.
-John Hathaway, Tocqueville Fund
http://blog.milesfranklin.com/circles-lots-of-broken-circles
Central banks lend increasing volumes of script to a lesser and lesser effect. Soon it will have no effect and be worthless. Why do you save in fiat currency script. Get something of intrinsic value.
If the country won’t leave the Euro, do it yourself and look after number one.
Something’s gotta give
Maybe the Euro and the EU are Fracking
http://www.thedailybell.com/4166/Cracking-of-the-Euro-Elite-The-Triumph-of-Hope
Did some reading on Alexander Hamilton. seems he was an agent for Rothschild. seems that his first bank of America as modeled after the bank of england, the worlds premier Central Bank.
Read at your leisure
http://www.google.ca/search?sourceid=navclient&aq=1mK&oq=Hamilton+and+rothschild+&ie=UTF-8&rlz=1T4SKPT_enCA449CA449&q=alexander+hamilton+and+rothschild&gs_upl=0l0l0l13896lllllllllll0&aqi=g-K1g-mK1g-q1s1