Currency Wars

The world is a boil with currency devaluations, interest rate cuts and quantitative easings (QEs) by numerous central banks. Because of the recent slump in oil prices, the Canadian central bank has just cut its lending rate … with another commodity exporter, Australia, expected to follow suit shortly … see: CNBC Story. And today Mario Draghi of the European Central Bank is expected to announce the start of another QE program totaling perhaps 500 billion euros … see: Another CNBC Story.

I have in the past commented on what has degenerated into a major pissing contest between the central banks of the more developed nations and what the consequences that might result are … see: Race to the Bottom. It seems to this observer that the world has been lulled into an expectation, led by the now retired Chairman of the U.S. Federal Reserve Bank, Ben Bernanke, that central banks are the panacea for all the world’s economic woes.

Clearly monetary policy, in the long run, cannot solve basic economic malaise … yet the world’s stock markets now seem addicted to the opiate of easy money and very low, even negative, interest rates. This cannot all end well … at some point, possibly sooner than we wish, as Obama’s reverend, Jeremiah Wright, would say, “the chickens will come home to roost.”

What is now an illogical deflationary monetary and commodity spiral, I somehow expect, will flip into run-away inflationary in a nanosecond. Money is, after all, just gussied-up pieces of paper representing a political promise. Be prepared for these promises to be broken …

Funny Money

Quantitative Easing (QE) ... this seems to be the central banks of the world's solution to their mounting debt crises. The European Central Bank (ECB) has just taken its cue from Ben Bernanke of the U.S. Federal Reserve Bank (Fed) and embarked on a three year binge of QE (see: Boston.com Article)  What does this mean?

It means that European banks can borrow at a 1% rate from Mario Draghi's (ECB's President) piggy bank and turn around and lend it to various European countries at north of 5% (sometimes well north) ... government largess that rivals the green-energy give-aways in the United States. This is meant  to recapitalize these banks which have been weakened by the haircuts they are taking on Greek bonds (and others to follow?)  I sometimes wonder why the ECB doesn't just give the damn money to these banks instead of this obvious artifice.

This mimics what has been happening in the United States where the Fed has been lending money to our banks at below 1% and they, in turn, have been buying government bonds at higher yields ... not quite as lucrative as in Europe, but largess nonetheless.  And where does the Fed get this money to fire-hose out to the banks?  Not from the U.S. taxpayer, but it creates it out of thin air.  It sells U.S. bonds, bills and notes to get the cash to lend out to U.S. (and foreign) banks (and to fund our huge annual deficits).

And why, you ask, does not all this selling of U.S. government debt obligations push down prices and push up yields.  Simple ... because the Fed buys for its own account around 80% of everything it offers.  This financial slight-of-hand has increased the Fed's balance sheet almost three-fold in the last three years (see: QE Comparison) ... a dizzying statistic ... if we can rely on this reporting since the Fed may also be playing Enron-like accounting shenanigans (see: Finger on the Scale).  Zowee!  If the Wall Street Occupiers only knew these funny-money tricks that were taking place at the Fed, they might move north one block and become Pine Street Occupiers (where the Fed is located).

I'm not quite Ron Paul on this issue yet, but I am getting closer.  For those not yet nodding off, I intend to blog more on this whole mare's nest later ...