Europe Resorting to Voodoo Economics to Avoid Becoming Japan
Economics / Euro-Zone Jun 06, 2014 - 01:56 AM GMTBy: Money_Morning
Shah Gilani writes: It’s a mixed-up crazy world, especially when it comes to figuring out economics.
Just look at European stock markets. Many of them are making new highs today.
Why is that crazy?
Because stocks making new highs has nothing to do with economics – unless we’re talking about voodoo economics.
Apparently, things in Europe are so bad that the president of the European Central Bank (ECB), Mario Draghi, announced in a press conference today that the ECB was cutting the base lending rate from 0.25% to 0.15% and taking other “stimulative” measures.
That’s why stocks went crazy and made new highs.
Why is that crazy?
Because the ECB is resorting to desperate, never-tried-before measures to stem a Japanese-style deflationary spiral that could sink European economies, tank the euro, and destroy the European Union.
In other words, things are so scary in Europe that the ECB feels it has to take extraordinary measures to prevent another recession – or worse.
And stocks are making new highs on account of how desperate the outlook is?
Sure, it’s voodoo economics. Pump money into the system, and stocks rise. It’s bubble-icious. It gets worse, though. Read on, and I’ll tell you exactly how crazy all this is …
Who’s Watching the Dam?
Dropping the base lending rate to a historical low isn’t that big of a deal. It’s what else The ECB is going to do that’s really crazy.
Since 2010, the ECB has been bailing out European countries by buying up their distressed government bonds when no one else would. This is when rates were rising to a point where if they were to go much higher some countries would have literally imploded.
However, the ECB insisted, this wasn’t quantitative easing. It was adamant the Europeans weren’t going to be as reckless as the U.S. Federal Reserve and engage in an experiment that could unleash massive inflation.
So that its bond purchasing program would not be viewed as quantitative easing, the ECB engaged in “sterilization.” Sterilization is basically a neutralization program that takes as much money out of the system as the ECB is pumping in when it buys government bonds and pays with cash. Theoretically, that then floats around in the economy.
To take money out, which it put in to buy bonds, the ECB paid interest to banks to park money at the ECB. That made sure that whatever money the bank flooded the system with was then taken out of the system and parked with it.
That’s gone by the wayside now. As of today, the ECB isn’t going to sterilize any more.
In fact, to flood even more money into the system, not only is the ECB not sterilizing by paying banks interest to leave money with them, it is now going to charge banks to park money with ECB!
The big brains at the ECB are now moving its deposit rate to negative 0.1%.
And that’s the “sensible” stuff they are doing.
They are also doing something crazy. The ECB will be taking in asset-backed securities, basically anything that’s asset-backed, including junk and distressed and underwater securities, as long as they are “asset-backed” and lending against that collateral.
Seriously, how desperate are things across the Atlantic?
The Fed did the same thing in 2008 when the financial system was about to melt down. Is Europe there now?
And stocks are making new highs?
And U.S. stocks keep making new highs?
It’s raining money.
As the lyrics of one of my favorite Led Zeppelin songs go, “If it keeps on rainin’, levee’s goin’ to break.”
Money Morning/The Money Map Report
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