As you now know, Europe is set to announce a new QE program. I wish these money printing rocket scientists would call it like it really is, outright monetization but then again the average non thinking person might ask questions? The leak yesterday said the size would be 50 billion euros per month, or more (it turned out to be 60 billion). Thinking about this from a far away view, we can glean a few hilarious aspects.
First, let’s look at “size”. If the program is “only” (more was expected) 60 billion euros per month, this will amount to around 720 billion additional euros outstanding a year from now. From a “money perspective”, this amount is far less than the QE 3 the Fed just publicly (privately maybe not) ended and smaller than the current Japanese operation. The markets may view this as “smaller than hoped for”, I of course have a different perspective. If we add up the production of all gold globally from the mines, we come to a ballpark number of a whopping $100 billion. Compare this to the (newly devalued) figure of 720 billion euros and we can round this off to just over $900 billion. So, in just one year, Europe will create nine times the amount of trash currency as the entire world creates of gold …in one year! The ECB plans to purchase this amount of debt for two years, nearly $2 trillion worth!
Going just a step further, let’s look at this $100 billion worth of gold which is produced annually. I am going to tell you that as far as the “world” is concerned, there is NO new gold produced! How can I say this? All you need to do is look at how much gold just China and India combined take off the markets each year. The answer is “all of it”! Actually, that’s not true unless we add the phrase “and then some”! So from a size standpoint, Europe is proposing to create nine times the amount of currency as new gold is produced, yet none of the gold even hits the market to add to the current stock. Yes I know, there will be those amongst you who say this is wrong. But is it really wrong if 100%+ of new gold supply gets devoured and vaulted by China and India never to see the light of day again? Yes it is “stock” but it will never in our lifetimes “flow”!
Let’s now look at few of the other “little snags” in this European brainchild. First, can Europe handle more debt collectively and what about the ones who cannot? The ECB is proposing a “one for all and all for one” strategy when it comes to responsibility to this debt, will the Germans agree to this? What will happens when push comes to shove and countries with no financial wherewithal just shrug their shoulders when they cannot make the debt service payments? Does this mean that Germany becomes the “one for all”? Wasn’t it just a couple of years ago the PIGS debt was on the verge of collapse and rates were skyrocketing? Have they really healed their balance sheets or do they now have MORE debt and HIGHER debt ratios? Are we to believe they are now safer? One last thought, the ECB is the central bank to Europe, should they really be prompting their flock into issuing more of the poison that caused the problem in the first place?
Another question becomes, what about Greece? Will the ECB purchase their bonds? What if Greece’s elections finish and the winning party decides to hold the ECB ransom “restructure our debt or we will default …or just take our ball and leave”? How is this going to be handled? Another aspect going back to “size” is that the 720 billion euro QE will be three times or more the size of current issuance, isn’t this the reason the Fed was more or less forced to stop QE …because they were taking too much collateral out of the system? Will this force banks to purchase lower credit quality debt in their reserves or does it just mean interest rates all throughout Europe will be negative? Does this mean investors will “pay” interest to insolvent deadbeat nations like Portugal, Spain and Italy amongst others? I know it sounds quite strange to have to pay interest on your lent money to an insolvent entity, but this is where we are headed!
While we are on the topic, what about “negative interest rates”? To begin with, if you think about it negative interest rates cannot last forever or even for a long time because it means the lenders in the end will lose all their money. (From a humorous standpoint, maybe this is a good thing because at least they lose all their money “slowly” rather than all at once!) Also from a Mother Nature standpoint, only the very best money does not need to pay interest, all the rest do and the interest rate is decided by the risk of creditworthiness and strength of currency. In this instance, they are all the same sloppy currency but Greece is not Germany even if they do both begin with a G. If negative interest rates were normal, borrowers would end up with everything and lenders would become extinct.
Also, wouldn’t this hurt the banking sector in another way than just making collateral impossible to find? Wouldn’t the smart ones just go into their bank and withdraw everything and hoard the cash which wouldn’t require the constant haircut of negative rates? What does this say about velocity?
All of the above questions and thoughts were things the Swiss have thought about for years. The “commonality” was a problem for them and they decided not to join the EU in the first place. Now, the Swiss National Bank has looked at this current scheme and decided to cut their losses. Why should they continue to purchase euros if they know the official policy is to debase and ultimately ruin them? The Swiss have made a decision, my topic for tomorrow will be “The ‘neutral’ Swiss seem to have chosen sides” as they announced a new renmimbi hub based in Zurich. Do you think they might have known about this last Thursday when they pulled the plug (peg) on the euro?
One more question or two before we finish, why does Europe even need to do this now anyway? Hasn’t their currency already substantially weakened versus the rest of the world and grossly versus the Swiss? Isn’t this “REALLY” what QE is all about? Weakening your currency faster than your neighbor so you can steal his market share of exports?
In reality, Europe is playing Russian roulette with a fully loaded gun! Their currency is already weak, yet they want it weaker. They are already broke, yet they want to become broke(r). Rates are already substantially negative but apparently not negative enough. Good (if you want to call it that) quality collateral is already scarce, yet they want to take more from the banking and shadow banking systems. Germany is already not in such a good mood as to what has already been done, yet the ECB wants to rub salt in the wound of the very core of Europe.
In my opinion, this announcement of QE is a very bad choice and very poor experiment. QE has not worked anywhere else in the world, why will they be any different? Before they even announced this they had already received two very important and fully negative votes. The Swiss have abandoned them and gold has exploded higher and broken out to the upside. Maybe they are more fearful of the market hearing Mr. Draghi say “we were just kidding”? He has promised this bazooka for several years and jawboned the markets higher each time it looked like full out collapse was imminent. Now they will fire this so called bazooka, the worst possible immediate outcome would be for their markets to spasm downward in response. Speaking of “response”, isn’t it curious the ECB “leaked” 50 billion euros yesterday? I am here to tell you, they floated that trial balloon because they were fearful of the response. When the market didn’t go spastic, they upped it another 10 billion for good measure! The ECB is in a panic, otherwise no “leak” would ever have appeared. They have lost control, they know it, it is only a matter of time before the markets realize it.
We have already experienced huge volatility which has certainly made some participants insolvent. As I see it, this new episode lays the track towards even more volatility. High volatility in a system that’s quite low on liquidity and quality collateral in the first place is a toxic recipe. This will definitely not end well though it may end very abruptly when it does!
Hi Bill
Well I just read on ZH that the Danes have upped their negative rate to -.35% to defend their Euro peg. Dé ja vous anyone?
I’m watching gold capped at $1300 as the Cartel desperately try to stop it reaching escape velocity and the EUR/USD plummeting rapidly.
The Swiss just upped their negative rate to -1.05% on the 1 year to stave off the Euro invasion.
And mental Mario has just decided to print €60bn per month.
What part of the above does not spell imminent implosion?
I very much doubt anyone reading this hasn’t already bailed out of their bank and run for the hills clutching as much Gold and silver as they can carry, but unfortunately most people who will end up reading this article will be the post apocalyptic survivors desperate to understand what hell just happened after they will be staring through the smoldering remains of what was once their high street bank!
very well put!
As far as I know, to counterfeit a currency is illegal. Apparently it is not. Maybe I should get more educated in printing my own euro’s. Seriously. This is becoming really stupid, especially because I work for that piece of paper. These so called “Money Masters” are attacking every form of sovereignty of the EU nations and their citizens. We’re not in charge anymore, clearly. Were we ever..? There must be an abstract way to get out of this. If I were to hold leverage behind the scenes, then that is exactly what I would do: attack the supernational entity with something that no single person can ever deny: the truth. If the right person just says “something” and it goes viral, then it might be over. It might be that simple.
the “abstract way” is to convert counterfeit to gold and silver.
They are buying more time in addition.
maybe, maybe not.
I think it was Peter Shift that recently said.
What should happen eventually does happen.
Anybody with a basic understanding of Fiat Currency knows that dilution only weakens.
The race to the bottom is fully under way and the question that needs to be answered is who causes the dam to break.
I would think Germany (the strongest piece of the ECB puzzle) is not happy.
If they choose to not participate in the dance to the finish the party ends sooner.
I do not believe for one minute that the people making this decision do not know what the outcome will eventually be….
Lets all hurry to jump off the cliff so we can smell the pretty flowers in the valley below.
very astute Mike, dilution and the Germans, like oil and water they do not mix!
your right…I should have said “trying” to buy more time.
I think.
What a great quote, Bill: “If negative interest rates were normal, borrowers would end up with everything, and lenders would become extinct.”
Try that activity with a child’s piggy bank, and see how long it would take for the child to figure it out. Your next visit to the piggy would find it EMPTY!
Hopefully these thieves won’t be at the door with guns….
..and if they are, hopefully you have a loaded one on your side of the door!
Things sure are heating up fast now. Not sure if you saw this but Ukraine has officially pissed off China. Ukraine Stiffs China for Billions Owed.
http://rinf.com/alt-news/featured/ukraine-stiffs-china-billions-owes/
Not sure I would want China on my bad side.
thanks d man, China will be paid with IMF $’s
Thanks for your analysis Bill.
Hopefully Germany will “nut-up” (Ms Merkel notwithstanding) and walk away from the madness. Hey Drag E Queen, know what makes an economy grow? Human effort.
once a Goldmanite, always a Goldmanite!
Bill, with huge headlines every day you must be busier than a one-legged man in a kicking contest. Thanks for another good article.
When all major fiat currencies fail simultaneously (has that ever happened before?) what will the price of gold be? To me, that’s an academic question because I won’t be “selling” for cash anyway. At that point, PMs will be money, as designed by our wise forefathers, and I will only trade them for other assets and/or services. Hard to be taxed for capital gains if my 1964 dime is the other side of a trade for a dozen eggs.
It is happening now, gold going higher against all currencies except the franc. Can’t imagine being a one legged man in a kicking contest, I kick boxed for years and had one at the Felt Forum, talk about goosebumps!
Today, live on pay-per-view: Holter vs. Draghi!!
My non-fiat money is on Bill “Golden-boy” Holter. Keep hittin’em hard where it hurts. All these Keynesian cronies, technocrat turds & counterfeiting banksters need to get their a$$es kicked!
always below the belt in a street fight!
Good calls Bill and love the line “europe is playing russian roulette with a fully loaded gun”
I’m torn between a feeling of the “walls closing in” and “the chains falling off”.
concentrate on the former, the latter will not happen easily.
It’s like going to take a final exam; but having the feeling you are all studied up for the test.
Bill, thanks in advance for your tutorials in this regard because I feel when the day comes that we wake up and PMs have tripled over night; we might not have this medium of communication available for a while.
very true, it could well go silent for a time?
Hello bill
Just a thought ,is it possible that the fed will raise rates just to stick it to the world so to speak wont that send pretty much every currency into hyperinflation except the us dollar which would go even higher you know Hitler couldnt take over the world militarily but the USA can do it economically because of this reserve currency status
Is this a stupd line of thinking ?
just to add to the upper comment
everyone is lowering rates some negative but the us will raise this sure would make some fireworks but it sure wouldnt help us gold prices but every other country would benefit
POOF!
it won’t work, the East will not let it happen, plus, all derivatives will blow up and the dollar is credit based …POOF!
Bill,
A question I’ve had for years that has never been answered.
You say, “Good (if you want to call it that) quality collateral is already scarce, yet they want to take more from the banking and shadow banking systems.”
If they buy bonds with euros the banks no longer have bonds to be used as collateral. I get that. But they now have euros. Why aren’t these euros considered ‘quality collateral’ like the bonds are?
Great article by the way,
Icarus
thanks Icarus. For one thing, in the old days when there was actually an interest rate, banks and ins. cos. needed bonds to pay annuities, pensions etc.. Also, cash is just cash and cannot be rehypothecated 10 times over. I understand your confusion, it is the shadow banking system that really suffers because they don’t get the cash and have a smaller pool of debt to lend from.
I saw a blurb where the US Commerce Secretary is grumbling about the strong dollar. QE4 will fix that! Jim Rickards’ Currency Wars playing out. What I don’t understand is how gold and silver are still available with negative interest rates. Also, Bill Gates is now pushing for a cashless society. I guess they need that so you can’t hide from negative interest rates when they come here, but that has to be great for PMs going exponential.
Rickards is a spook spreading false info.
Excellent article Bill! Excellent! I just wanted to add that the dollar spiked high off this news and is now the most crowded trade of all times. I believe what was done with the Swiss was a pretrial for the dollar. The reason is because the Euro/Swiss trade was crowded and people were taken by surprise. What will happen if this is done to the dollar? People and businesses will be slaughtered! Another thing is this:
The US was the first to come out with a Bazooka with the QE program and also had the Euro/dollar swap thing going on to save Europe back when the European crisis started to take hold. Now we are seeing something totally opposite. I firmly believe that this Pass The Bazooka” thing is over. All Europe did was the same thing the Fed did but the difference is the dollars are in Euros and not USD.
People need to wake up, see and smell the BS that was done just a few years ago. Nothing has changed for the better but has gotten worse. I can see the debris all over like the Tsunami which hit Japan and caused that floating Island of junk to come over to the west coast. What will happen come Monday if Greece leaves the Euro? Gold and silver are already buzzing for that news also. Noticed they front ran this EU news? The system is broken and this will not end well for us all. When greed has gotten to the hilt, the world is left covered with Filth!
no, this will not end well.
P.S this just in. The Saudi king has died!
yes, I e-mailed my entire group, this might be the most obvious Black Swan in front of all of our faces. What now happens to policy? Does it reverse and the derivatives get whipsawed again? Who do they ally with? Us? China and Russia? Lots of questions over one dead man…
Yes and not to mention that the dollar is now hyperinflating. I believe as kyle Bass said they intend to kill the dollar and we are seeing it right now. No real market has done what the dollar is doing for the past 6 months. The deception is to get it high enough so when they revalue it, it will look like it still has value. If we cut it from 100 it will be 50. Problem is, the value is already 99% gone so at 50cents we will be in negative territory!
and sucking in the dollar long specs along the way.
I was over in Italy about 5 or 6 years ago I asked my Italian tour guide, how did you like it when they forced you to take euros for your lyri? My tour guide replied,well I had 50,000 lira in the bank and they gave me five thousand euros for my 50,000 lira. I said, didn’t that upset you and make you angry? My tour guide replied, Oh No, because it took a thousand lira to buy a hamburger, and the bank has promised us they would not let the Euro lose its value.
promises, promises.
Ummmm
So your tour guide had enough lira in his bank account to buy 50 hamburgers.
I wonder how many liras it would have taken for a bottle of beer to wash it down.
With that much money saved, no wonder he was happy. lol
“…outright monetization but then again the average non thinking person might ask questions?” No Bill, they would not know what the word meant. Event if they said money printing it would not matter. They would not know what questions to ask. I used that the term “money printing” in a conversation recently. It caused no alarm to all. It did solicit one question, “why can’t they just keep on printing it” (so everything just keeps on working as it is now). I kid you not. The could says they are going to take the value of money to zero and all you would get is blank stares.
truly sad.