The Beginning of the End for the European Union

The European Central Bank initiated a new mass money debasement scheme yesterday.  If you recall, this involves buying €60 billion ($66 billion) a month of European government bonds.  Somehow this is supposed to improve the economy.

No doubt, the European Union is absurd for many reasons.  According to J.P. Morgan, the differences of its member countries are greater than a reconstruction of the territories of the former Ottoman Empire, all countries on Earth five degrees north of the Equator, and all countries beginning with the letter “M.”  Conveniently, the ECBs effort to cheapen the currency merely holds the absurdities up for ridicule.  Here are several questions that come to mind…

Where does the ECB get the money to buy government bonds?  Does the ECB get it from the same place the Federal Reserve gets its money?  Like the Fed, does the ECB make a ledger notation and borrow it into existence?

To whom will the ECB give the money to?  Will they buy German bunds?  Will they buy French OATs?  Will they buy Italian BTPs?  What about Greece government bonds?  Or Spanish?

How much funny money does each country get?  How does the ECB decide how to flail the funny money around?  Who gets the most gravy?  Is it the country that deserve it the most…or the least?

Negative Yields

These are the answers ECB President Mario Draghi must come up with.  These are answers that wouldn’t have to exist if the ECB wasn’t intervening in markets.  Nonetheless, there’s still another questions…

Isn’t the ECBs bond buying program the same as the Fed’s quantitative easing programs?  Obviously, it’s similar.  But, if you can believe it, it’s even more absurd.

For buying government bonds of individual member nations by the ECB would be kind of like the Federal Reserve creating money from nothing and buying state bonds from Kansas, or Montana, or California, or Indiana, or any of the 50-states.  Naturally, it’s a complete mess.

What’s more, short and mid-term duration bond yields across Europe have already turned negative.  This means lenders are loaning money to European governments at a guaranteed loss.  In other words, lenders are paying for the privilege to loan money to European governments.

“Across the euro zone, yields on many short- to mid-dated bonds have turned negative in recent months,” reported CNBC.  “Germany’s two-year and three-year Bund yields, for instance, are trading around the negative 0.2 percent threshold, with the curve not turning positive until the seven-year Bund.  France’s two-year bond is trading around negative 0.15 percent.”

Certainly, the ECBs purchases will further distort credit markets…

The Beginning of the End for the European Union

Last Thursday, for example, bond yields in Europe went down.  In fact, the weaker economies of Italy, Spain, and Portugal, all closed at record lows.  Remember, yields fall as bond prices rise.  Thus, speculators are front running the ECB.

Draghi doesn’t seem to notice or care that he’s made a casino out of European credit markets.  He thinks the economy is improving.  He believes this is the final policy touches he needed to bring prosperity to the region.

“While reiterating that the ‘risks surrounding the economic outlook for the euro area remain on the downside,’ Draghi also said they ‘have diminished following recent monetary policy decisions.’

“Buying assets on a broad-based level was the “final set of measures,” the ECB President said.  ‘In order to increase investment, boost job creation and raise productivity, both the decisive implementation of product and labor market reforms and actions to improve the business environment for firms need to gain momentum in several countries.”’

Though Draghi says these are the ‘final set of measures’ they likely won’t be.  The Fed’s and the Bank of Japan’s experience is that it is much easier to start quantitative easing than it is to end it.  So what Draghi believes are a ‘final set of measures,’ will ultimately be the beginning of a long term, long ranging asset purchase program that will end in disaster.

Hence, it is not the end.  Nor is it the beginning.  Rather it is the beginning of the end for the European Union.


MN Gordon
for Economic Prism

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