Since the 2008 economic meltdown central banks all over the world are printing money in huge volumes. Part of those funds will cover humongous deficits. The rest will be used to buy toxic assets and junk bonds – the same ones commercial banks were bingeing on during the economic boom.

You heard this from me many times – QE (quantitative easing) has NOTHING to do with stimulating the economy but rather it is a covert form of saving the bank sector from responsibility of their actions. The second goal of printing currency is to buy bonds of an insolvent government. No one in their right mind would have done it but the bankrupt government which chooses to bankrupt the state (instead of reforming the budget). It is with money created out of thin air that politicians are buying more time for themselves making bad situation even worse.

Until now it was the EBC (European Central Bank) who was destroying (by depreciation) their currency the least. The EBC policy was different than any other central bank's policy. Thanks to German’s memories of terrible repercussions of hyperinflation.

International financial elite lately pressed on the EBC to take some weight from FED and start its printing machines. Mario Draghi, EBC chairman (Goldman Sachs’s pal) did what he could to get a permission to do this but it seems he failed.

Draghi tried to force his idea of ‘stimulating’ European economy from long time but he lost his main battle and probably rest of his political leverage inside the EBC.

What it translates to is that the slowest deteriorating currencies in the next year will be EUR and CHF which is directly correlated with euro. Conservative monetary policy is crucial to keep both individual states and whole Eurozone healthy.

Increasing supply of money is not a panacea to cure economic problems. We have the best example in Japan. Yen is systematically being depreciated for over 20 years now and Japan cannot get out of a recession. Although it seems that this policy is a clear failure the printing machines are burning red from their speed. Inflation is already getting cosy around the world and it will be felt by consumers, that’s for sure.

Coming back to Europe a decision to not print entails serious consequences. Many European countries are indebted. Their debt level is beyond point of return and a possibility of paying up the debt is very slim. This is an acute problem among Southerners: Spain, Portugal, Italy, Greece and also France.

It may be very quick for the international capital to penalise non-conformists from EBC and start selling bonds of eurobankrupts. We saw a demonstration of strength when few days ago yield of Greek bonds jumped from 7% to 9% and stock exchange in Athens recorder 20-year lows.

What happened in Greece is just a preview what can happen on a bigger scale. There is no real scenario in which debts of many countries will be paid back.

From the international banking cartel point of view the optimal solution would be to print more money until the end of given currency. This would reset the debt along with all society’s savings.

If EBC blocks this option, someone else needs to bear the consequences of insolvency of a number of countries. In normal world costs would fall on commercial banks that mindlessly binged on bonds hoping that EBC will save them (with bail out) and buy all toxic assets.

In the situation when central bank does not wish to help banking sector something must be done. Change of laws is another step and freshly ended G20 summit in Australia has decided that governments will not be responsible anymore for bailing-out banks classified as SIFI (systematically important financial institution) or TBTF (too big to fail).

What has changed is the technical definition making depositors (owners of deposits in banks) have the same role as bond owners or other financial instrument owners.

Effects can vary. Starting with ousting from the guaranteed deposit system which provides a safety-net for those who don't have enough resources to cover their obligations and ending on changing deposits into shares of insolvent bank (I mentioned it when writing about the Cyprus deposit grab).

It is hard to be a prophet now but knowing a stance of EBC a confiscation parts of assets is becoming more real than ever.

We can suppose that the risk of a part of banking sector falling due to a bail-in is big enough that debts of the Southerners (owned by many banks) will be taken over by the central bank of Japan. Price will be higher than inflation of yen. It is also possible that after a transitional period the FED will accelerate its printing machines and save European banks – a déjà vu from 2008.

On the other hand, if the US faces any serious problems it will be beneficial for Americans that Eurozone is losing its power. An example of a serious problem is a challenge or attack on the petrodollar.

Finally decaying yen and Eurozone troubles will inevitably push capital towards more stable USD.

 

Summary

Regardless of whether EBC’s hand was pushed under a athreat of Germany leaving Eurozone or other circumstances, in the long term those actions are in a good spirit. Unfortunately, responsible and tough decisions sometimes mean short-term complications. Complications could mean a significant danger for the whole banking sector.

Unless no central bank buys European debt, weight of it will fall onto the European society. First owners of 100,000+ EUR deposits will feel the pain.

In my opinion, smaller depositors will also be hurt as their savings could be swapped for worthless shares of banks.

I believe that holding considerable amount of assets in banks during zero-interest rate period is an unnecessary risk. For this state to go back to normal there is a clear need for some steps.

To start with, a non-commercial (credit, savings) banking should be separated from a commercial and investment banking.

Secondly, limitation on the leverage level should be introduced in the market of derivatives.

Finally, and this will hurt like hell, debt of nearly all developed countries has to be reduced to prudent levels. This move is paramount but also a very painful reset, but the longer it is postponed the more damage it will cause.

 

Trader21