While the rest of the nation pays far too much attention to Charlotte, yours truly is watching Europe, where the euro is being shoved closer to extinction.
Granted, that’s not what Mario Draghi – head of the European Central Bank – wants to do, but to quote Spock: “What you want is irrelevant; what you have chosen is at hand.”
Draghi and his fellow ostriches at the ECB are hoping to bring down borrowing costs for Spain and Italy (among others) by engaging in “unlimited” buying of their government bonds (Telegraph). However, since bond-buying is how central banks usually accelerate growth in the money supply, Germany has been reluctant to give Draghi the green light – as the Germans know so painfully well, higher money supply can lead to higher inflation.
So Draghi’s plan is to “sterilize” the bond purchases, i.e., “take the equivalent amount of money out of the system elsewhere” (same link) – likely by selling the bonds of governments from nations not in the market’s crosshairs.
So what could go wrong? Simply put, the ECB could run out of “safe” bonds to sell.
In effect, the ECB is trying to peg the interest rates and Spain and Italy at a rate below current market rates, much as nations sometimes try to peg their currency at a certain rate compared to the dollar. However, a nation’s currency peg only works if they have enough foreign currency reserves to sell off in order to buy their own currency to keep the peg up. If the market thinks the the reserves are too low, they’ll sell off the currency, and destroy the peg, and profit as the currency falls in price.
Markets can react the same way to the ECB’s attempt to keep Spanish bond prices high (and thus rates low), and given Spain’s serious budget problems, I suspect the markets will react on just such a fashion.
Thus, when the ECB runs out of safe bonds, their failure will shatter confidence in the eurozone – and it will be open season on Spain, Italy and other southern eurozone economies.
That none of this is even being noticed in Europe, let alone discussed, is reason enough to conclude the European elites no longer know what they’re doing. We await the inevitable crash.
Cross-posted to the right-wing liberal