Mutually Assured Destruction

Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.

That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.

Apparently, no one believes in capitalism anymore.  Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.

While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. Draghi

It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices.  So they keep digging.

A Bigger Bazooka

A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.

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Bazooka or Blunderbuss?

Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.Bazooka 2

Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.

He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.

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The United States of Europe

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets.

Will QE have an impact on interest rates if they are already near zero?  How much lower can they possibly go?  And if interest rates that low have not stimulated spending and investment, what difference will a few basis points make?  QE is enacted to lower interest rates, because – in theory, anyway – the lower rates go, the more they will stimulate spending and investment.  However, European interest rates are already near zero and the interest rate on bank deposits is negative.

Why is the ECB worried about lower

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Less than “Less than Zero”

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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