Europe readies the printing press

The ECB appears to have created a path to implementing Fed-like easy-money policies. If it does, it's a huge game changer for Europe and the world.

By Bill_Fleckenstein Aug 24, 2012 2:05PM

A potentially important development took place last Monday when the U.K. paper The Telegraph ran a story by Ambrose Evans-Pritchard headlined "Germany backs Draghi bond plan against Bundesbank." Because I think it is so important, and because the article itself was so succinct, I am going to quote liberally from it.

 

The story begins:

 

"Germany's director at the European Central Bank has thrown his weight behind mass purchases of Spanish and Italian debt to prevent the disintegration of the euro, marking a crucial turning point in the eurozone debt crisis.

 

"'A currency can only be stable if its future existence is not in doubt,' said Jörg Asmussen, the powerful German member of the ECB's executive board.

 

Bundesbank execs tour Maginot Line

"He signaled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.

 

"Mr Asmussen told the Frankfurter Rundschau that the surge in Club Med bond yields over recent months 'reflects fears about the reversibility of the euro, and thus a currency exchange risk' rather than bad economic policies in struggling states.

 

"The choice of wording is crucial. If it can be shown that the ECB is acting to avert EMU break-up -- known as 'convertibility risk' -- bond purchases would no longer be deemed a bail-out for Italy and Spain.

 

"Mr Asmussen confirmed that purchases may be 'unlimited' in scale, a far cry from the half-hearted intervention of the past two years, which failed to stem capital flight."

 

Movie night at ECB now featuring 'Transformers'

The article went on to report that it was able to confirm a story previously reported in Germany's Der Spiegel that "technicians" at the ECB were looking at ways to cap Spanish and Italian bond yields, among other options.

 

The author also went on to note that Asmussen was appointed to the ECB by German Chancellor Angela Merkel, and that he is close to her inner circle. Thus, this story has a lot of credibility and goes a long way toward explaining why Draghi was so confident when he said recently that the ECB would be able to do whatever is necessary.

 

My, and others', recent musings have centered on the fact that Draghi had hinted he could focus on short-term bond yields  as a way to deal with broken "monetary transmission mechanisms." Now this "convertibility risk" wrinkle is another way to rationalize bond purchases in a more or less unlimited quantity. In other words, this will allow the ECB to mimic our own Federal Reserve.

 

It is important to note that while nothing has happened yet, there is now a clear path to get the ECB to the printing press promised land. If so, it is a very, very big game-changer. As I have stated often, if the ECB becomes the Fed, then the deflation fear trade, and all of its main consequences (e.g., indiscriminate government bond buying), are over, and the next big idea is going to be inflation.


That doesn't mean folks are going to instantly switch to an inflation fear trade, but that is where we are heading. Certainly, all those people who are concerned about deflation due to a banking and government bond market collapse in Europe will stop worrying about those things and will unwind positions put on to protect them from what they used to be afraid of.

 

They've got the whole world in their hands

If the ECB follows through on Draghi's bond-rescue plan, this development would cause a definite inflection point for the world, both in terms of economic activity and financial markets. (Of course, there is a little country that previously had a big impact on the world that is stumbling right now called China, but it, too, has monetary guns it can train on the problem.)

 

Timing is always guesswork, but my feeling is that we are in the ninth inning of the ECB's transformation. However, there is no guarantee the Europeans won't be able to bumble along for a while until there is another crisis that forces their hand. Nevertheless, the bottom line is that, either willingly or because it is being forced by markets, the ECB is developing the rationalization and techniques it will use to become the Fed.

 

The ninth-inning stretch?

My friend in Europe to whom I refer as "The Lord of the Dark Matter" echoed that comment in an email earlier in the week when he noted: "Because the situation in EMU (European Monetary Union) remains so bad, and could get worse over the rest of the quarter and next, Draghi will have no choice but to embark on European-style QE (aka, quantitative easing). But just not yet."

 

Thus he seems to think that Draghi's hand will be forced. I don't think the motivation really matters. Draghi is going to get there, and I believe that will happen in the next 90 days.

 

 

78Comments
Aug 25, 2012 9:54PM
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This just sounds like a bad idea and is not economically sound.  Lets ask post war Germany and mid-80's Japan what a good idea it is to look to the printing press.  It took them decades to recover from too much money printing.

They should really take a look at modern history to know that printing money is not the answer which is why I am sure Germany has been so steadfast in not printing.  Its not going to solve anything.  Its only going to bring the Euro and soon the Dollar on a course to poverty for a generation.

Aug 26, 2012 2:16PM
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What about Greece? How can the ECB commit to purchasing Spanish and Italian debt without solving the Greek problem?  Not one mention of Greece in this article. Greece is trying to postpone their mandated austerity measures.  Spain and Italy are no dummies, they will follow suit.

 

There has been a lot things said, a lot of meetings, a lot of "personal guarantees." In the end... if the Germans don't like the deal, there is no deal.

Aug 27, 2012 8:20AM
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How do all these economists, bankers and heads of state figure out that printing fiat money out of thin air with nothing to back it up is the solution to all the worlds economic problems? How do they get away with diluting the money supply by devaluing currency and causing inflation will somehow miraculously create jobs and prosperity in the long term. It only adds massive debt, steals from people's savings because the currency loses purchasing power. Where do all these buffoons come from? Wake the F**K up people!!!!!!
Aug 27, 2012 2:41AM
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Look where printing money with nothing to back it up has gotten us.....Is Europe that dumb?!!!
Aug 27, 2012 9:24AM
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Printing money  will do a couple of things...

It will push stocks higher.
It will drive commodities higher, especially SPECIE.
It will devalue bonds and Euro's in bank accounts.
It will drive down interest rates, rewarding debtors and punishing savings and capital formation.

With  capital formation depressed,  government will have more control of the banks as they  will be lending government money, not depositors.

This should lead to more unemployment.   Printing Fiat money has never solved any economic mess, it just makes the problem worse.

Aug 24, 2012 6:03PM
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I  think Bill Fleckenstein is suggesting that, as he has done frequently before, that inflation and money printing will be good for precious metals and precious metal mining stocks.

So the timing for these purchases would be relatively soon.

Aug 27, 2012 10:02AM
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Stimulus and bankruptcy are the same thing. The only difference is time.
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Stay the cource. Silver and gold will be a good investment long term.
Aug 27, 2012 9:28AM
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once again the European government and the ECB are aligning themselves against the interests of the people of Europe.
Aug 25, 2012 1:03PM
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"Where to invest?"

Your first choice was agriculture. This year, 70% of our crops burnt up and now spider mites infest the farmlands. The Bonneville aquifer is depleted. My choice here would be- glass-roof farms and recycled mesh shaders to reduce the intensity. Seed? That's Monsanto. No thanks. I'd concentrate on helping the heirloom companies in my glass-roof farm investments. I don't think there's people in America who actually trust funds and organized investment any longer. Your other choices are a foreign entity or platform that imports. No thanks. What do I need Mexican produce at Wal-Mart when an efficient cubic garden in my yard yields food without the Montezuma's Revenge from use of polluted water.

Come on, guy. It's time to snap out of your delusion and wake up. Please let us know where you ironchef... I'll pass if that's your thinking. 

Aug 25, 2012 7:42AM
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Andrew Dickson White: Fiat Money Inflation in France. No, Dave from NY... buying metals wouldn't be the wise move. You have to think outside the rut to what it looks like when fiat money printing debases currency completely out of economy. You can pay as much as you want for metals but they won't be used as currency replacement. Clean underwear might, shoelaces and flour might, but people without jobs and viable currency units do not resort to metals. There is no applicable relevance. The Gorilla in the room is China, 'the undermina' and it's clever elimination of employment everywhere. Should EUC decide to print, it better hand regular citizens enough cash to start small businesses that destroy and replace import platforms. Like us, Europe's only hope is to recover jobs. When that doesn't work because Elitists blockade it, the alternative is replacement and ousting the Elitists. In White's book the direct comparisons of France then and the world now are alarming. Inflationists are ruining us. They own the businesses that terminated personnel and they invested the windfall proceeds in debt instruments. Purpose: to cause post-collapse inflation as we recover that lifts both their platform business and pays interest on the debt. Not this time. Europe can do what it wants but another Central Bank infusion without job creation kills it off. That will take us down because our platforms and banks are heavily in Europe too (so is your 401K, pension and savings you trusted to brokers bankers and financial planners). Here, we either force new currency and call the green Dollar null and void, or we tell Ben Bernanke to- hand regular citizens enough cash to start small businesses that destroy and replace import platforms.With city after city falling, it should occur to you that we aren't "spending like crazy" (GOP whine), we are failing to generate enough revenues to float this boat because the largest segment of the population here in America is unemployed under-employed or no longer working. The last group... largest since WWII. Go get a job, you say? There's obviously more to it since poverity isn't exactly fun. Instead, ask yourself if those who are employed (all the way to the top) are performing to the same standard that existed when we were prosperous. The lower ranks are working like slaves, the upper are earning 500 times the rest of the workforce. The businesses invest now, they make and do nothing. Get it?

 

Close the banks. End the Federal Reserve System. Get rid of Wall Street. If we aren't 100% invested in job recovery right now, we won't be here by the New Year.

Aug 27, 2012 9:48AM
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Andrew Dickson White wrote: Fiat Money Inflation in France, about the economics of the French Revolution, in 1876. Youngest professor ever at U of M and eventual Founder of Cornell U. I'll take his accounting over Mirage's babbling everyday. Inflationists (people who cause recessions after buying stocks and bonds in order to capitalize of economic disparity and then recovery) rally behind failure. Printing more Dollars reduces the value and family spending validity of all that is already out here. We aren't talking theories... it's a condition that has repeated itself because the same old money families keep themselves afloat with it. BREAK the pattern. LEARN from history. NO QE... make the banks perform or SHUT THEM DOWN. Half the Fed Governors have it nearly correct... raise up the Bank Rate to double digits (halts inflation, Paul Volcker proved it in 1981), force validation of stock prices or GET RID of Wall Street because it manipulated us all adversely. Focus 100% on JOB RECOVERY because creating jobs won't restore the revenues or put skilled people in roles that would thwart administrative control and platforms that import.
Aug 26, 2012 1:01PM
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The same "pretenders" with little validity other than V_L,  And, even he needs to do some interenet research and must live on the "net".  He should be on Fox News along with Juan and Bill!  Just kidding V_L!  O'Reilly has lost it as far as I am concerned as "the spin stops here" stuff.  Now, Beckle is much the "fleck" as he entirely "blinded by the light".  Sure, they are going to start the "priniting presses"  ... that is and was a foregone conclusion before and is more prevalent now with the "race" on the forefront.  But, who really cares!   Big ado about nothing as nothing will change.  We are a "dumbed down" nation and there is no end in sight to this.  Frankly, I am just enjoying this fiasco that "we" have allowed.  Sleep tight as your "government" is 'engarde; and "ingraved"...indelibly in your "pockets". 
Aug 24, 2012 3:40PM
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so bill, are u arguing that the game changer would be big positive for stocks?  wouldn't inflation hurt?
Aug 27, 2012 2:39PM
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MirageGuy is mostly right in his summary assessment. However, in terms of gold (specie) as priced in dollars, there are conflicting statements here. If the dollar rises, as it will if the Euro is devalued, the gold price will tend to go down (as priced in dollars). It doesn't mean gold is valued less, it just means the dollars are suddenly worth more.

Of course this is all a knee-jerk reaction. In the long term, real inflation depends on the velocity of the money--whether the banks actually loan it out--and not just the amount sitting in bank reserves. However, since Euro governments (theme song "I'm just a girl who can't say NO") can't stop their deficits, it's likely the money will cause inflation through those leaky boats if not by productive lending.

The sad part is, right now our own government is playing the same tune: "I'm just a girl who can't say NO". So it won't be many years before we're in the same boat.

Aug 27, 2012 1:13PM
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  So long as our concern is only for banks and wall street, nothing will solve the economic plight of most people. We need to stop banks from getting billions in 0% loans and manipulating the commodities market. They are driving up the price of oil and other essentials and using our own money to rob us. Everyone knows this and nothing is done to stop it.

  All government guaranteed loans should be made directly for a small interest. This would cut house notes and rentals by half or more and leave trillions in the hands of our people instead of thieving banks.It is crazy to pay a bank 600k for a 200k house whe the tax payer backs the loan.

  All public owned corporations should be forced to pay our minimum wages wherever they go. This woud show a little respect for workers and bring back many jobs fast. Instead, we give these pigs protective treaties and tax breaks to outsource for slave labor.

  It appears that Europe, just like us, is being run by a corrupt financial system that produces nothing and takes more and more. The capital gains tax, where most giant money is made, is and insane low of 15%. There are prostitutes in washington who want to eliminate it totally. This is insane unless you are a wall street billionair whith no long range vision or values.The people of America will force real change or be pushed into depression and chaos.

  Hopefully the people opf Europe will stand up agains the evil and greed that is wrecking us all.

Aug 26, 2012 3:19PM
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If the ECB chooses to run the printing press at 'full throttle'  ... my guess is they must not be too worried about shipping oil stockpiles within the ECB ... as those stockpiles are low.

 

omrpublic  iea  org  /  stocksearch  .  asp

 

or google

 

'oecd europe residual fuel oil'

 

In 1929-1930 ... when the US stock market tanked ... it was about a year before the European banking system folded ... which induced the 'second leg' down in the market ... which didn't bottom until 1932-1933.

 

I have no doubt the ECB is doing everything it can to delay the inevitable ... in the hopes something cracks over in Asia. Maybe China ... or maybe Japan.

 

Stockpiles of oil are on the low side in SE Asia as well.

Aug 25, 2012 10:48AM
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Commodity prices tend to rise with inflation because they are in limited supply and are easier to pass to downstream consumers. For example, when the price of basic groceries goes up it is generally because the cost of raw materials that go into production of these items rose. But buying the physical commodity behind most goods is not practical for most people. 

Where to invest? First, invest in agriculture companies or funds . This includes seed and fertilizer companies, agriculture machinery companies, and companies who manufacture food. Food or other soft commodities like cotton and sugar, aren’t the only area to think about. Use exchange traded funds to invest in hard commodities like oil, gold, and other metals. If you think energy or gold prices are rising, then invest in a fund that owns these assets. 

Sep 6, 2012 11:36AM
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9/6/2012
Gold, Silver, Energy, Everything up today!  I don't care about what other people say as long I can make money to keep up or beat inflation.
To V_L  If you bet against America, you will lose.

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

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