Try As He Might, Mario Draghi’s Magic Levers Just Won’t Create Growth

Mario Draghi is unhappy with the EU.

 

He’s not unhappy with the concept of the union; rather, he’s unhappy with the fact that EU banks are not lending money into the EU economy.

 

In Draghi’s imaginary world, bank lending = “growth.”

 

The reasons for this are A) he’s a former Goldman Sachs banker and so associates any and all bank actions with profits (which contributed to his wealth and power) and B) he has no understanding of how the real world works.

 

Bank lending only contributes to growth in a meaningful way if the capital is deployed effectively. If a bank lends money to someone to start a business (using the guy’s house as collateral on the loan), significant growth only occurs if the guy’s successful in deploying the capital to bring in sales.

 

If you don’t have sales, you don’t have a business. Without sales, our imaginary entrepreneur simply has an increased debt load that, if he fails to pay it back, could result in him losing his house.

 

Sure, he might hire some people to work for him using the capital from the loan to meet payroll. But unless his idea brings actual money through the door, these jobs, and his business (along with his house) will soon be gone.

 

Moreover, it’s not like the bank does well from the deal either. If the economy is in the dumps (as it is in the EU today) and the entrepreneur’s new firm fails, the bank is left with a foreclosed home that it can’t sell. And God forbid that home prices are falling at the same time (which they are in much of the EU) because the bank will be sitting on a deflating, illiquid asset that produces no return.

 

Capitalism is a tough game and success has little to do with capital or bank loans. According to Harvard Business School, 75% of all startups with at least $1 million in funding DON’T even return investors’ capital.

 

Put another way, three out of every four startups that convinced investors to give them at least $1 million in backing fail to even pay back the initial investment.

 

We’ve barely scratched the surface of how start-ups and the global economy really work, but already we’ve come up with multiple issues that reveal just how misguided and overly-simplistic are Mario Draghi’s beliefs in the importance of bank lending.

 

And this is the biggest problem with all Centrally Planned economies and monetary policies: they all reduce the world to a control room with various levers titled, “interest rates” “inflation” “QE.” Central Bankers seem to believe that it they pull various levers, growth will magically occur.

 

It’s a vision of reality so simplistic, you’d think a 10-year came up with it.  Anyone who’s actually started a business or created jobs knows a bank loan isn’t the key to success. Moreover, it's not like all bank loans are the same… or that cutting interest rates will only produce one particular desired outcome and no unintended consequences.

 

A bank loan is just money (well, actually it’s just debt). And if you cannot deploy that money in such a way that your returns exceed your debt payments, then you’re in fact worse off than you were if you’d simply not taken out the loan to begin with.

 

Draghi’s solution to this problem? Cut interest rates to negative so that you have to pay to keep your deposits at a bank. He believes that if rates are negative banks will be forced to lend.

 

To return to our control room metaphor, Draghi believes that he simply hasn’t pulled the magic “interest rate” level far enough (even though it’s already at the floor). So he drilled a foot into the floor and pushed the lever down into the hole.

 

We do not mean to single out Draghi as uniquely misguided. His counterparts at the US Federal Reserv or the Bank of Japan are no more attuned to economic realities. At the end of the day, a handful of Central Bankers are betting the entire financial system on their misguided theories.

 

No one knows how this will play out. We all know on some level that it will not end well, but exactly how and when it will all backfire remains to be seen. We’ve already had two epic Crises in the last 15 years. By the look of things, we’re heading for a third one in the not to distant future.

 

This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://ift.tt/170oFLH

 

This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.

 

Best Regards

 

Phoenix Capital Research

 

 

 

 

 

 

 




via Zero Hedge http://ift.tt/1ww5iR6 Phoenix Capital Research

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