Europe is in the easy money now

The Continent's chief banker offers a quixotic solution to its debt problems. Can he really pull it off?

By Bill_Fleckenstein Sep 7, 2012 2:00PM

Image: Euro © Royalty-Free, CorbisFor the past month, and perhaps two, folks have been anticipating Federal Reserve Chairman Ben Bernanke's speech at Jackson Hole, Wyo. (which he delivered a week ago), the Sept. 6 meeting of the European Central Bank, the German Constitutional Court ruling on Sept. 12 -- the next big data point -- and then the meeting of the Federal Open Market Committee on Sept. 13.


My view has been that we would get money printing from the Fed and that ECB President Mario Draghi would morph into Bernanke and come up with his own easy-money policy (as I discussed last week).


Though it is not knowable when those outcomes will become clear to all, Bernanke's speech heavily telegraphed a third round of money printing (aka QE3). And, thanks to Thursday's ECB announcement, we know that Draghi is committed to unlimited bond purchases. Of course -- wink, wink -- he is claiming those purchases will be sterilized, but that is an impossibility.


Just call him Mr. Clean

For anyone who doesn't know, sterilization means that for every euro's worth of bonds that the ECB buys, it immediately sells an offsetting amount to avoid expanding the money supply. Usually the central bank does that by buying a maturity of one length and selling one whose maturity is similar or shorter. Thus, there is no net change in the amount of money (in theory), but a maturity (or credit) that is unpopular gets a little help on the demand side, while a more popular one gets more supply.


Bernanke also used to talk about a theoretical form of sterilization when he discussed the Fed's exit strategy, although that approach to sterilization is one that is more "legged into" -- i.e., buy now, sell in the future. At this point, however, the Fed makes no pretense about an exit strategy.


As an aside, for some time when Fed heads talked about these policies, they claimed what they were doing wasn't really printing money, because they were eventually going to sell. (Right.) At this point, of course, that pretext has been totally dropped, and the idea of an exit is something for a debate in 2015 or 2016.


What's more, the Fed would have you believe that it will have no problems executing its exit, which is silly. No single entity (nor any group) has enough capital to buy all the bonds the Fed won't be buying when QE ends, on top of all the bonds the Fed would need to sell.


He might be taking that supply curve a little fast

I bring all this up because, as noted, Draghi claims he is going to sterilize his purchases.


Well, if you're buying the debt of Spain, Italy and potentially France (not to mention Portugal or Greece), there is a lot more problem debt to buy than there is debt you would be able to sell, such as Germany's or Sweden's, or the bonds of some other, more fiscally prudent country. And you obviously can't be selling the same government's debt you are buying and expect to provide any relief.


That means it simply can't happen. Obviously, when you contemplate unlimited purchases, you need to realize that it is literally impossible for you to sell an unlimited quantity. It doesn't even work in theory, and in practice it really won't work.


Nonetheless, the ECB can easily pretend it is going to sterilize its purchases, and it may actually do it to some degree for a little while, though I have no idea whether the ECB has even crafted the wording for how it plans to execute its sterilization. Perhaps it will come down to "just trust us."


But if you take a step back and look at how far its leaders have come, and how many rules it has changed, it is quite clear that if push comes to shove and the selling part of the sterilization isn't possible, Draghi will just say, "Forget about it; we'll do it later." Or he will invent some wiggle room, claiming that the transmission of monetary policy in certain countries has been impacted, just as the ECB has used that rationale to allow it to do what it is doing now.


It is ironic to note that if the debt of the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain) starts trading better, and German debt trades worse, reversing that would require the Germans to acquiesce on the very money printing they are trying to avoid.


In any case, for the world to finally stop worrying about a deflationary accident in Europe, we need to see the German court deem the European Stability Mechanism constitutional on Sept. 12, and for the Fed heads to actually launch QE3. I think both of those things will occur. Thus, we will continue to find ourselves in a world where every major country and currency bloc is printing like mad.


In sum, the world will be awash in an even bigger sea of confetti, one so large that perhaps opinions about the desirability of paper money may change.


The idea seemed fine, on paper

In that environment, stock prices can go haywire, and inflation will most certainly ratchet up, though we don't know how long it will be before inflationary psychology changes and the bond market disciplines central bankers with declining prices.


In the old days, if a country pursued these strategies, it would see its currency collapse versus others. But it is hard to have a currency crackup when all of the major currencies (the Swiss franc, the euro, the yen, the pound and the dollar) are being debased in massive quantities. Thus, the only way to protect oneself is to own something that can't be debased -- such as gold, silver or some other rare asset.


I believe I have accurately described the state of the monetary world, and I feel strongly that the deflation fear trade is yesterday's story, though it may still play out for a while. Since we can't know when bond markets will sober up, it is too early to short bonds -- or stocks, for that matter -- but that time will come. Meanwhile, folks need to have protection from the world's central bankers in the form of hard assets.


At the time of publication, Bill Fleckenstein owned gold.


Sep 8, 2012 12:40AM
My main doubt is whether Germany will go along with what´s being announced by Draghi or will make the process a tough one, in terms of austerity demands to approve formally requested bailouts. In general I agree with the author.
Sep 8, 2012 10:19AM

Don't have kids bottom line I have 1 and my poor grandchildren keep printing money. My advice rack up as much debt as you can get all those credit card offers when you go broke borrowing the goverment will take the tab aka "bankrupt". So why not pile it on after all they can always print more money. Remember the Weimar republic had thair day so we will have ours well.. our children. My last question is where is this money going? We have digital remember so they can add the money before they even print it Europe is printing money China and Usa of course the markets will boom but where the heck is all this stuff going were talking trillions globally?


Sep 7, 2012 7:21PM
Well said!  So did you buy more gold or sell it,  At time of publication you owned gold. 
Sep 10, 2012 6:02AM

Here's some disturbing data.  If you subtract out excess government spending from GDP, growth for 2009 to 2012 has been:


2009: -12.9%

2010: -6.0%

2011: -4.5%

2012: -4.2%


So we're really still in a deep recession, and the only think keeping the official GDP numbers above zero is the deficit.  :P


Sep 10, 2012 10:31AM

What creates Jobs?  In it's purest form it the pursuit of PROFIT.  Companies produce a product to sell at a profit.  In order to produce said product they must gauge cost and labor.

Governments do not create jobs, unless they run at a PROFIT.  The best government can do via taxation is to destroy jobs, and then redirect the money collected to create new jobs.  Since these jobs do not create profit, they  actually create more unemployment in the private sector to support them.

AS government grows, marginal enterprises cease to exist as the cost structure prevents PROFIT and thus capital investment.    

If you want JOBs, you MUST shrink government, plain and simple.  "57 States" has increased government from 18% (even this is unsustainable) to over 26% of GDP.   What results is stagnation in private industry.   This is what we have today.  

Debasing the currency only forces those without means to spend all they have.  People with savings move those savings to better stores of value than government issued fiat currency, like Stocks and Specie.

To say we are heading down the path of economic folly is there for all to see....
Sep 9, 2012 2:37PM
Great article gold and US dollars.......continue to sell Euros and Yuan.......and pick some really productive growth stocks!
Sep 10, 2012 1:58PM

The ECB problem is that its going to have to sell all its bonds from strong countries--Germany, Finland, etc.--and load up its balance sheet with weak countries bonds, which can devalue quickly. Especially since the ECB says it will forego its prior requirement that any bonds it buys become "senior". So the ECB balance sheet is at risk here, after the honeymoon is over for this action, when Spanish and Italian bonds start to go downhill again. That means the Euro will devalue, even if the action is "sterilized".


Of course, this may never happen, despite what Draghi says, because this is basically screwing the German and Finnish economies to pump up the PIIGS. And one wonders how much the German voters will let themselves be screwed, especially when there is no real reform in the PIIGS (except for Ireland, perhaps).

Sep 10, 2012 8:54AM
I have come to view Central Banking as similar to masterbating.  These folks have an idea of what they want and they determine their action through an idea which is no longer realistic or viable yet they pound away thinking the result will be beneficial.  The time frame for any benefit has become less and less and if you stand back and take a look at the long run they have become counter productive.  We have to turn the lights on and expose these folks for the failure they actually are. But with a continued dumbed down populace and exquistely framed corrupt political industry good luck on that.  Once we have 50 million folks in soup lines we may return to some sense of reality and get back to the realistic work ethic we are all harnessed with as humans. Dreams are important but sometimes we allow the wrong people the opportunity to live their dreams.   Central Bankers are living in a dream world and we need to wake them up.
Sep 10, 2012 2:48PM
Is the only solution we have for the worlds economic problems is printing money?? Is the spices homo sapiens real a superior being or just another dumb animal. Printing money is just another way of kicking the can down the road. To solve our economic condition is going to take guts, moral structure, intelligent and leadership!! Where to hell is it???
Sep 10, 2012 11:42AM
So what it's all a numbers game anyway. Given the fiat monetary system we live under that monetary and fiscal statistics mean little if anything to the individual. Getting a job, investing, saving and spending a little is all you can do. Let the rich and poor fight over your tax dollars and enjoy life, it's too short to spend on crusades and fanatics.
Sep 10, 2012 7:30AM

As told by Andrew Dickson White (youngest professor ever at U of MI, Founder of Cornell University) in his book: Fiat Money Inflation in France (about the French Revolution)... Inflationists kept printing more fiat currency that never trickled into the economy until it was using new fiat to compensate for prior fiat currency obligations or, phony money on top of funny money. Notably, the identical no-pulse economy on Main Street. Europe is literally reliving the French Revolutionary period! We are here, as well. With no job recovery and a waning interest in tangibly produced indigenous products, most nations of the world are counting the days to monetary stalemate. China actually has not made anything for what... two years now, if we examine coal surpluses and other indicators there. So, most economies are living off excess supply without ANY revival of fundamental industry or local commerce. If America doesn't wake up really soon, it will run out of clothing sooner than the 15 years it would take to rebuild textile to retail industries.


Wealth during these times is pure crime. Close the banks. End the Fed. Get rid of Wall Street. If we aren't 100% invested in job recovery and fundamental manufacturing of essentials, we won't outrun the crash. We don't eat paper, so why are why paying paper pushers instead of founding industry?

Sep 10, 2012 5:38AM
This is engineered collapse nothing is backing any money it's borrowed money to pay back debt? Don't work the USA is buying it's own debt. Stock up on foods or watch your family starve or brave the riots.
Sep 10, 2012 11:36AM
It's all a shell game. Sooner or later, through deflation of asset values, inflation of money supply or increased taxes the worlds fiscal and monetary system will have to come in balance with reality. That doesn't mean that there won't be a lot of opportunities and risks but someone has to pay for all the excesses of capitalism and socialism.
Sep 10, 2012 10:46AM

The stale regurgitated rhetoric warning us to BEWARE of the dreaded Bush economics that got us into this problem is nothing more then mindless solders of the left with no ideas. The details sound something like the tax cuts and wars created this problem.  If the tax cuts were such a bad economic idea then why do they want to continue 99% of them. It’s hypocritical at best.  Then it’s the un-funded wars that caused our demise. For on thing we were attacked, and second spending on defense creates jobs. Then it’s that those horrible Wall Street capitalists that prayed on the unprotected and vulnerable. The financial mess was equally contributed to by controlling political parties through out the world and was hardly isolated as some desperate political pundits may claim. What causes job loss is impeding business to grow due to regulation, environmental roadblocks and a lack of demand. Dont let anyone convince you otherwise. If you want a job vote republican.

Sep 9, 2012 11:56PM
i don't thing that Mr draghi can give money to bail the needed country with out the approve of the rich country's in Europe Germany and France if those country's will not approve it he can kiss is plan goodbye
Sep 10, 2012 3:45PM
"Why don't we hear much about Canada?  Everything must be great up north.  I wonder what Canada has to say about the rest of the worlds economy."

Where do you live? I live directly across the border from Canada. Everyday, there is gridlock on all the border crossings. Canadians come to America for basics. They pay too much for gas, food, toilet paper, milk AND if they don't spend enough when they buy stuff in Canada, there is a tax for that. You know why YOU don't know that? Because in Canada they don't have a democratic government fighting for our Rights and Freedom. They have 9 families that dictate to government there and puppets to do what they need done. I loved going to Canada... when America was free and I didn't need a passport to talk to my neighbor.
Sep 10, 2012 7:54PM
Just what is going to happen when State Governments start handing out I.O.U.'s for everything from unemployment checks to your tax returns.  It's time for everyone to get out of debt.

Mark Twain has described a mine as "a hole in the ground owned by a liar."

If or when gold reaches 2000.00 dollars a troy ounce.  I am going all cash.  Getting out of the stock market until the Dow Jones Industrial Average goes well below 10,000.  Is this a good or bad idea?

I have a feeling that the great depression is starting to happen all over again.  Never thought I would see it in my lifetime.  My father always warned me it could happen again.  My father always told me to save my money.  Don't you hate when your father is right.  He never said to invest in gold.  He would always tell me to buy land.  Maybe when I am out of the stock market, that is what I might just do.

My father was like Mark Twain in some ways.  He would always say "Never get married to a girl until you took her swimming."
Sep 8, 2012 1:01AM

I don't think the author understands the way bonds are traded.  It IS possible to trade "unlimited" quantities as there will always be investors, banks, etc willing make a purchase for the right price.  All this means is that rates are pushed lower for long term / "riskier" bonds at the cost of higher rates on short term / "safer"  bonds.  So yes, Germany will be at the short end of the stick.  But all the  "it simply can't happen" talk is bunk.


"Meanwhile, folks need to have protection from the world's central bankers in the form of hard assets."


Obviously Mr. Fleckenstein wants you to contribute to the rising price of his gold investments.


Sep 10, 2012 1:06PM

"As usual, you have it all backwards.  The fact that government spending is currently carrying GDP on it's shoulders tells me we've regressed into a partially socialist nation. If you want to see a good example of what happens to countries that turn socialist, take a look at Greece."

Greece- formerly free until coaxed into joining the EUC. Once in, sees it's domestic hallmark products duplicated in China and the USA. Loses the majority of businesses that employed workforce. Sees influx of paper pushing that rises to dominance. The people protest because they are steadily pushed in suppression and submission. Suddenly, the Greek government says... oops, we borrowed more than we can pay back so let's borrow more, shattering the remaining fragile economy. People there riot and burn down banks who could not account for deposits or actions. Government is given to ex-Central banker who borrows them further in debt, raises his own pay. Is ousted by an election. Since the election, the EUC has made threats but does zero about job recovery. Meanwhile the people revive the Drachma to provide currency on Main Street.

WHERE is the Socialism in that? I'd call it a desperate attempt to restore FREEDOM paired with a basic survival move that works. Globalization is Socialism or worse-- lifetime servitude to the fat master bankers and bloated inheritors of old money- worldwide.

Sep 14, 2012 12:36AM
Helicopter Ben has arrived again today!
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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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