Last Tuesday we remarked that Mario Draghi and the European Central Bank were receiving valuable on the job training. Most notably, that money creation operations are much harder to stop than to start.
By Thursday, Draghi confirmed he’s an astute learner when he announced to an audience of business leaders in London that the ECB would do “whatever it takes to preserve the euro.” What exactly that is…one can guess. But Draghi will have the opportunity to explain it to everyone this Thursday when the ECB’s governing council meets.
Details aside, and in confirmation of the adage to ‘buy the rumor sell the news,’ world markets celebrated the announcement with a manic rally. The DOW ran up 207 points on Thursday and another 190 points on Friday. “Mario Draghi Just Put a Floor in Market, Pros Say,” declared a CNBC headline.
But what type of floor is it, really?
Certainly, it isn’t a marble floor keyed into granite bedrock. Rather, it’s a floor of decaying wooden crossbeams and piers posted into unconsolidated sediments prone to liquefaction and subsidence. Markets could break through the cracks in the floor at a moment’s notice.
Using Adhesive Tape to Control Diarrhea
No doubt, Draghi has his work cut out for him. He must somehow convince the world he can save the euro with monetary policy. But what can he really do?
For one thing, he can destroy the currency. That really seems to be his only option. In other words, the Eurozone financial system is encumbered with so much debt, Draghi must weaken the euro to save it.
Of course, his main objective is to inflate the money supply to bailout the banks. His other goal is to cap the interest rate of government debt…particularly, Spanish and Italian government debt. But how?
With any luck, on Thursday Draghi will tell us. In the meantime, we are eager with anticipation…for we can’t wait to hear what preposterous ploy is proposed to further distort credit markets.
Interest rate capping, obviously, is an extreme form of government intervention into markets. In plainest and simplest terms, interest rate capping is price controls. It involves fixing the price of money.
According to author and publisher, Gary North, over a half century ago, United States Senator Wallace Bennett, explained that price controls are the equivalent of using adhesive tape to control diarrhea.
Senator Bennett may have meant that price controls are messy and horribly inadequate for meeting their intended objective.
No matter how you look at it, Draghi and Fed Chairman Ben Bernanke are fighting a losing battle. They are attempting to counteract a debt pyramid of crumbling bricks with digital ledger notations of funny money. Nothing quite like it has ever been attempted in human history.
Back in the good old days, like in Weimar Germany, the printing presses had to run night and day to successfully devalue a currency. Nowadays things are remarkably more modern. Money creation is shrouded. Liquidity injections are targeted. Central bankers appear in control as they walk the fine line between inflation and deflation.
Nonetheless, it’s a fraud all the same. Money is cheapened. Savers are scammed. In the end, the middle class gets hollowed out like a coconut. Unfortunately, the adverse consequences of western economies trying to get something for nothing cannot be indefinitely postponed with novel monetary policies.
Quite frankly, at this point, Draghi and Bernanke are just winging it. They have no real plan. They’re holding licked fingers up to the wind and making things up as they go along.
Perhaps there’s a slim chance they’ll dodge all the financial disasters and catastrophes headed their way. More than likely, if they try hard enough, they’ll unintentionally and inevitably achieve collective destruction for Europe and the United States.
It’s their only alternative. If they stop now, the great default will occur. If they continue to destroy the currency, they can suspend the default until they destroy us all. With enough determination, our money will be worthless.
for Economic Prism