Real e Finance means business
The 'Helicopter Economics
Investing Guide' is meant to
help educate people on
how investing choices in
the current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which involve
unprecedented money
printing. This is the official
blog of the New York
Investing meetup.
Investing Guide' is meant to
help educate people on
how investing choices in
the current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which involve
unprecedented money
printing. This is the official
blog of the New York
Investing meetup.
___________________________________
___________________________________
________________________________________________________________
The truth and nothing but...
The EU Has Fallen
Into a Liquidity
Trap and It Can't
Get Up-Jan 16,
2012
Into a Liquidity
Trap and It Can't
Get Up-Jan 16,
2012
While the EU is still reeling from S&P's downgrade of the sovereign debt of
nine of its members on January 13th and the latest talks to keep Greece
afloat have hit a wall, there is an even bigger problem with the
effectiveness of its stimulus programs -- the money is just not finding its
way into the economy.
Global markets were jubilant in December when the ECB (European
Central Bank) pumped 490 billion euros of three-year loans into the EU
banking system. These funds were used by eurozone banks to buy high-risk
government debt from the struggling peripheral countries. This indeed
caused a temporary decline in interest rates, especially for Spain and Italy.
Money from this program and other EU stimulus measures is stuck in the
banking system however and it is doing little to keep the EU from sinking
into a deep recession. As of Monday January 16th, the ECB had 493 billion
euros on overnight deposit -- more than the entire December stimulus
package.
Large amounts of funds on deposit at any central bank are an indication of
a crisis in the banking system. Before the current EU debt crisis, eurozone
banks usually kept only around 100 million euros on deposit at the ECB.
Even during the height of the 2008 Credit Crisis, EU banks kept only around
33% of money lent out by the ECB on deposit. The percent now is over 70%
(the ECB has lent out 664 billion euros in total) meaning things are in much
worse shape in the EU than they were after Lehman Brothers collapsed.
When money is trapped in the banking system, the economy suffers and
extra stimulus measures don't help to revive it. EU money-printing
measures meant to rescue its profligate debt-ridden members aren't likely
to help its economy, which in turn will result in a self-feeding cycle of
more and more debt (as happened in Japan during the last two decades)
or more and more money printing (as has been taking place in the U.S.
since the 2008 Credit Crisis). Like the U.S., the EU has run out of borrowing
power, so debt without money printing is no longer an option.
Weaker economies mean more downgrades from the ratings agencies
can be expected. On Friday, both France and Austria lost their coveted
triple A ratings from S&P. They were downgraded a notch as was Malta,
Slovakia and Slovenia. Italy, Spain, Portugal and Cyprus were downgraded
two notches. Italy is now rated BBB+. The only countries in the eurozone that
still have triple A ratings are Germany, the Netherlands, Luxembourg, and
Finland. S&P put the later three on negative outlook for a possible future
downgrade however. The EFSF bailout fund itself may also be downgraded.
The current debt crisis that is now impacting the entire eurozone started in
Greece in late 2009. The problems there have yet to be fixed despite
numerous mainstream media reports to the contrary in the last two years.
Greece is now on financial life support. Any missed bailout payment from
the EU will send it immediately into default. Talks have broken down once
again, but as before will once again be resuming shortly. The market has
never been convinced that any of the proposed Greek bailouts will work.
On Monday, Greek one-year government bond yields hit a high of 416%
and 10-year yields a high of 35%. These rates have continued to rise after
each bailout proposal. Greece has to make substantial bond payments
this March.
The EU's debt crisis is not getting resolved because it is no more possible to
solve a debt crisis with more debt than it is to sober up a drunk by giving
him more alcohol. Yet, every mainstream news article has comments
from well-placed sources that are hopeful that some resolution will be
coming to the EU's problems soon. Rarely is it mentioned they have been
hopeful -- and wrong -- for the last two years as the situation has
increasingly deteriorated. Nor is it mentioned that the Japanese with
similar problems in their financial system have now been hopeful for
twenty years that their economy will fix itself. Wishful thinking doesn't fix
markets, nor do plans involving spining straw into gold -- no matter what
central bankers and their toadies claim.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21
nine of its members on January 13th and the latest talks to keep Greece
afloat have hit a wall, there is an even bigger problem with the
effectiveness of its stimulus programs -- the money is just not finding its
way into the economy.
Global markets were jubilant in December when the ECB (European
Central Bank) pumped 490 billion euros of three-year loans into the EU
banking system. These funds were used by eurozone banks to buy high-risk
government debt from the struggling peripheral countries. This indeed
caused a temporary decline in interest rates, especially for Spain and Italy.
Money from this program and other EU stimulus measures is stuck in the
banking system however and it is doing little to keep the EU from sinking
into a deep recession. As of Monday January 16th, the ECB had 493 billion
euros on overnight deposit -- more than the entire December stimulus
package.
Large amounts of funds on deposit at any central bank are an indication of
a crisis in the banking system. Before the current EU debt crisis, eurozone
banks usually kept only around 100 million euros on deposit at the ECB.
Even during the height of the 2008 Credit Crisis, EU banks kept only around
33% of money lent out by the ECB on deposit. The percent now is over 70%
(the ECB has lent out 664 billion euros in total) meaning things are in much
worse shape in the EU than they were after Lehman Brothers collapsed.
When money is trapped in the banking system, the economy suffers and
extra stimulus measures don't help to revive it. EU money-printing
measures meant to rescue its profligate debt-ridden members aren't likely
to help its economy, which in turn will result in a self-feeding cycle of
more and more debt (as happened in Japan during the last two decades)
or more and more money printing (as has been taking place in the U.S.
since the 2008 Credit Crisis). Like the U.S., the EU has run out of borrowing
power, so debt without money printing is no longer an option.
Weaker economies mean more downgrades from the ratings agencies
can be expected. On Friday, both France and Austria lost their coveted
triple A ratings from S&P. They were downgraded a notch as was Malta,
Slovakia and Slovenia. Italy, Spain, Portugal and Cyprus were downgraded
two notches. Italy is now rated BBB+. The only countries in the eurozone that
still have triple A ratings are Germany, the Netherlands, Luxembourg, and
Finland. S&P put the later three on negative outlook for a possible future
downgrade however. The EFSF bailout fund itself may also be downgraded.
The current debt crisis that is now impacting the entire eurozone started in
Greece in late 2009. The problems there have yet to be fixed despite
numerous mainstream media reports to the contrary in the last two years.
Greece is now on financial life support. Any missed bailout payment from
the EU will send it immediately into default. Talks have broken down once
again, but as before will once again be resuming shortly. The market has
never been convinced that any of the proposed Greek bailouts will work.
On Monday, Greek one-year government bond yields hit a high of 416%
and 10-year yields a high of 35%. These rates have continued to rise after
each bailout proposal. Greece has to make substantial bond payments
this March.
The EU's debt crisis is not getting resolved because it is no more possible to
solve a debt crisis with more debt than it is to sober up a drunk by giving
him more alcohol. Yet, every mainstream news article has comments
from well-placed sources that are hopeful that some resolution will be
coming to the EU's problems soon. Rarely is it mentioned they have been
hopeful -- and wrong -- for the last two years as the situation has
increasingly deteriorated. Nor is it mentioned that the Japanese with
similar problems in their financial system have now been hopeful for
twenty years that their economy will fix itself. Wishful thinking doesn't fix
markets, nor do plans involving spining straw into gold -- no matter what
central bankers and their toadies claim.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21
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