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Trading Lessons

ECB Euro-zone Stimulus

Interest-Rates / Euro-Zone Jun 04, 2014 - 10:28 AM GMT

By: Raul_I_Meijer

Interest-Rates

Everyone expects Mario Draghi’s ECB to announce stimulus measures on Thursday. If the forward guidance, if we can call it that, which was ‘leaked’ by Draghi and his minions is accurate, we’ll see the bank’s main refinancing rate lowered, and the deposit rate perhaps even turned negative, with a less obvious set of measures that may include asset purchases also in the offing. The main goal must be to drive down the euro, which is still way too expensive from the point of view of exports and which therefore holds back ‘recovery’ in the eyes of policy makers, pundits and economists. But it would have to be driving down the euro without driving down stock markets at the same time.


There are a lot of things in just that one simple paragraph that are accepted as gospel, no questions asked, without having been tested or even really thought about. Now, I think that making the deposit rate negative is fine. Why would anyone want banks to be paid to store money with a central bank? Just tell them they can’t park a single eurocent with the ECB without paying a reasonable price to do so. And while you’re at it, the long-term refinancing operation (LTRO) could do with a revision. The stated aim for LTRO is to provide liquidity for banks that hold illiquid assets, but isn’t that perhaps just counter productive? If assets are still illiquid 5-6 years into the crisis, maybe it’s better to simply get rid of them, write them down, not aid and abet banks in holding onto them. It just makes it harder for anyone to know what a bank is truly worth if you help them hide their liabilities, and who needs that? Well, yes, bankers, but f you can’t get your ship and your gambling debts in order in 6 years, who needs you, really?

So trim down LTRO. And then do nothing else at all. Send a message to the world that you’re not intending to play the same game the US, Japan and China have been engaging in. If only because, well, look at where these countries find themselves. What’s to be jealous about there? And if Draghi announces “nothing else at all”, wouldn’t that drive down the euro all by itself? And yes, although we’ve seen markets ‘counter intuitively’ rise a few times recently on bad news, stock markets and other asset markets will probably get hit, perhaps even hard. But isn’t that what this world needs, isn’t it quite simply a good thing if as much of the free and cheap and zombie and ultimately empty stimulus money as possible is driven out of the system?

Zombie money is the biggest scourge of our times and our economies, not its savior, but just about everyone seems to have that completely upside down. The stated idea behind QE and other stimuli is to bring recovery through achieving an escape velocity that could help manage the debt load through – very – rapid growth, but there are no signs, other than some handpicked ones, that it is working. As long as it isn’t, the not-so-stated fact is that things are deteriorating, and quite rapidly too, since huge layers of additional debt are poured onto the already existing debt. Obviously, financial institutions and their shareholders are doing just fine at the cost of those who will have to pay back the debts.

But how does that fit in with Mario Draghi’s job description? What we have is rising stock markets and home prices – in many regions – combined with rising poverty, unemployment and not-in-the-labor-force rates. In what book is that a good direction to go in? How is creating an ever bigger divide in our societies going to help us in a recovery, or in life in general for that matter? If Draghi starts buying up sovereign bonds or asset backed paper, that may help banks and investors for a while, but at what price for the poorest in Greece, Spain or even Germany? And despite that price, there are no guarantees whatsoever that the benefits such actions may have will last. How much road to nowhere do we need to travel before we actually get there?

Tyler Durden ran a piece from The Diplomat written by Yang Hengjun today, Why Do China’s Reforms All Fail? . The reasons Yang gives, which are solidly interlocked, are the exact same as why present day central bank stimulus doesn’t work.

  • … all the reforms in Chinese history aimed to perpetuate the current system
  • … almost all of China’s reforms were done purely for the benefit of the ruler

Central banks seek to perpetuate a system that is already in place, even if it has failed dramatically and is even beyond repair, because central banks are not independent at all, no matter how much they are supposed to be. They instead control the money and credit supply of entire nations or associations of nations for the benefit of the rulers of the existing paradigm, be they political, financial and/or social. Central banks exist to make sure that if existing powers are broke or in danger, they get to feed off the wealth of the people. Therefore, while we may have democratic systems, though that is by no means assured from a political viewpoint anymore, these systems are really moot, since central bankers decide who rules and who pays for that rule, and they always pick yesterday’s favorites to hang on for another day. So if you’re looking for recovery and progress and sanity, you’re out of luck as long as Yellen and Draghi have the powers they do.

But don’t let me get ahead of myself. Draghi may still choose the way of the wiser, and do nothing on Thursday but to cut off a bunch of broke banks’ long overdue lifelines. And cause the very crisis that is the only way to get our economies and societies back on the way to real health, not the zombified kind we’ve been “living” for 6 years now. Hey, I can still dream and hope for another two days…

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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