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The Great QE Bubble Lives On

Interest-Rates / Quantitative Easing Jun 06, 2014 - 10:20 AM GMT

By: Raul_I_Meijer

Interest-Rates

This is one of those days where I wonder what I’m going to say about this one. It’s all too convoluted six ways to Sunday. Yeah, Mario Draghi delivered for markets and investors, and stocks rise a bit more. Like they’re not high enough yet, setting records in . One thing he didn’t do is commit to asset backed securities purchases, and so that is now what markets will be demanding from him next time around. Who cares anymore that ABS were the main conduit to blew up the same markets in 2008? Investors are happy, and Jack and Jill are ignorant. The Great QE Bubble lives to see another day. Yay!


The ECB has lowered its refinancing rate to 0.15%, its marginal rate to 0.4% and the deposit rate to -0.1%. Negative interest sounds like a big deal, but there are hardly any bank deposits left with the ECB, so despite the giamt novelty made out of it, this is just a paper measure. They took all these “bold steps” ostensibly because Draghi et al find inflation rates too low. But how would lowering interest rates fix that? Wouldn’t it be better to raise them, wouldn’t that be more inflationary (in the inflation equals rising prices sense)? It seems obvious it would, but that would kill the housing sector, among other things, and we want to keep people tied in to their mortgages, don’t we?

Still, at least raising rates would have been surprising, and volatility would have gone up, which is just what central bankers say they want – even if they don’t say out loud they badly need it -. Maybe the disparity between the Fed and BoE, who threaten to raise rates, and the ECB that lowers them, will lift the VIX. But that’s not certain by any means.

The newly announced $640 billion LTRO channel for business loans sounds nice, but interest rates are already very low, so they were not the reason businesses didn’t borrow. The real reason is in all likelihood hidden in the demand side of the real economy. Which, simple as it may be, is very poorly understood in economics. The ECB’s decisions are all based around economists’ extreme -and extremely wrong – focus on demand, which manifests itself in terms like aggregate demand and pent-up demand (of course the magical option is increased demand).

What they are (seemingly?) incapable of getting into their heads is that demand is not some sort of constant – let alone constantly growing – metric. That, like for instance this past winter when Americans were forced to spend far more than usual on heating and healthcare costs, there was no pent-up demand left come spring, because people were maxed out (they had spent their “demand”). For economists, when sales numbers have been low(er) than expected/desired during a certain period of time, that must mean more sales are just around the corner. Something went wrong, so you repair it. There is no risk that it can’t be repaired. That’s about as close to religion as one can possibly shirk without coming out on the other side of it.

The entire interest rate circus happens because the overriding “philosophy” amongst economists and politicians is that banks are more important than people. the idea is that if banks are doing well, that will automatically trickle up/down to the people. But why wouldn’t the opposite be true? If policies were aimed at making sure people as as well off and – economically – protected as they can be, wouldn’t that trickle down/up to banks? If stocks are up, then the economy must be good. If banks make solid profits, the economy must be good. And people are nowhere in sight, they’re an afterthought as best.

In the eyes of Draghi and Yellen and all the clowns who think like they do, our economies exist of banks and investors, not of you and me. But we are 70% or so of those economies, even if we can’t keep up with the demand they tell us their theories tell them we should be exhibiting. As societies, we clearly don’t have our priorities in order; we instead let others set them for us, but they’re not ours. The sooner we acknowledge this, the more damage to the lives and well-being of our children and grandchildren we can prevent from being unloaded upon them.

But we need to start doing that like about now. We need to realize that there is very little left that is being decided for us that actually benefits us, and that there are a million things being concocted that are only dragging us down ever further. Mario Draghi and Janet Yellen and Washington and Brussels are not trying to make this world a better or happier place for us, but for their banker friends. That is what I take away from Draghi’s performance today, from the whole financial world circus around it, and most of all from the silence in the real world as that circus put on its show. Will we really only react when we have nothing left at all? It’s starting to look that way. And you won’t have anyone to blame anyone but yourself.

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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