Get your rally hats on, boys.
My long standing prediction was that the EU would require €3 trillion in funding in order to get them to 2014. You may refresh yourself on this postulate, here.
We got the first trillion in LTRO’s 1 and 2 as direct funding to Europe’s banks.
Today, the seeds for the next two trillion – minus whatever pittance is sitting in the EFSF\ESM joke-of-a-failure – have been planted by Mario Draghi.
We will run higher on this news, as men and women with intellectual deficiencies run with the false assumption “printing = higher prices”. However, although it is flawed, do not doubt the ability of this false premise to ramp us another 10% higher.
In the real world, this news will crush the euro, sending the EURUSD below 1.2. At the same time, America’s exports will be taken for a short trip down river – never to be seen again.
Meanwhile, this monetary easing will not do anything for Europe’s economy, in a seeming-contradiction that will make the ECB’s amateur statistician’s heads explode.
The reason is because all of this money is slated to be consumed by the entitlement machine that is “European stagnation”. It was already promised to the people, and its effect is passively witnessed on the EU civilizations every single day. Giving someone what they already expect to receive does not change behavior.
Europe will continue to contract, as demand will not be stimulated and prices throughout the EU will ramp higher – strangling the people.
Here in the US, dollar strength is slowly setting the stage for the next bleed out. China is in a similar boat.
These purchases by the ECB will in time be shown to have actually made things worse for Europe. They are giving themselves 3 years’ worth of funding, conveniently getting them to 2015. However, the activity itself undermines confidence in the euro and any reason for long term investors to step in (not that they were going to anyway).
Thus this is a bastardized tradeoff: 3 years of short term funding in exchange for 30 years of long term funding. Imagine it like a wave…a tsunami…rolling through the short term paper, pulling the tide out on the long end, and crashing through anything that comes in its path – all budgets will be swallowed whole by this destructive force.
I will conclude by saying, prepare for a ferocious rally that will last through the holidays…probably. But have lots of spare cash on hand. Because as soon as the first round effects of this pump are exhausted, we will have to face that the state of affairs have been worsened from Draghi’s intervention.
4 Responses to €2 Trillion To Go
If everyone with a billion dollar net worth liquidated all of their net worth and shipped it off to the government in the forbes 500 they would still come up drastically short and it wouldn’t even be close to solving the debt crisis long term. The problem is the idiots in Washington who voted to pass theproblem on again and again in the first place. Obama’s keynote speech in 2006 that got him in position to be elected was all like “bush spends too much” and now he’s like “republicans, raise the debt ceiling and spend more”… if the billionaires just paid their fair share we wouldn’t have this problem? LO How many people are dumb enough to believe that. 16 trillion dollar debt and you think if the forbes 500 just liquidated a billion dollars cash that 500 billion would even begin to solve things? Meanwhile the idiots in Europe are voting for politicians who make promises that they can’t keep too and everyone wants to retire when they are 40 years old in Greece like they’r George Washington and can live a simple life tax free and live on a farm without actually living on a farm because of some ponzi scheme idea.
At any given moment, for any given issue, there are about 400 million people in the United States who believe they aren’t a part of the problem…
p.s. -the total net worth of The Forbes 400 totals $1.5 trillion… so confiscate all wealth and make it illegal for them to move overseas with it… AND THEN WHAT? The guys in Washington still need someone to fund their campaign and still need to pay for their own golden parachutes and continue helping out those that fund their campaign… Plus the richest 400 provide jobs and services. If they didn’t provide a service that people were willing to pay for, they wouldn’t have a dime. It’s a spending problem and a debt problem (debt would be more like 5-6 trillion if government never owed interest more or less to itself via the federal reserve while funding the primary dealers.) and it’s not just isolated to Europe or the US, but it is mostly the west. What happens when the government needs cash and can’t get a bid for their bonds? What do interest rates do then?
The level of force needed for Europe to escape their funding issues is roughly equivalent to a 75% dilution of all outstanding currency as of 2009.
Have fun with that.