The ECB has just about everything it can at the crisis over there.
But inflation continues to fall.
Indeed, a mere one month after the European Central Bank or ECB announced NEGATIVE interest rates, or NIRP, (meaning you have to pay to deposit your money in a bank) the EU’s inflation readings fell again to 0.4%.
This has Mario Draghi in a panic. As President of the ECB, he wants to force banks to lend so that inflation will rise. The reason for this is because Draghi believes inflation is the same thing as growth.
Deflation, to a Keynesian like Draghi, is an unspeakable evil that must be destroyed via currency depreciation and low interest rates. Deflation must never be allowed to happen, no matter what/
Why are the ECB and EU so concerned about deflation? After all, doesn’t deflation make everything cheaper for EU citizens?
The reason the ECB is so panicked is because Europe as a whole is up to its eyeballs in debt. Debt deflation means that this debt loan is becoming more difficult to service.
Consider that, taken as a whole, European banks are leveraged at 26 to 1.
In simple terms, this means they have just €1 in capital for every €26 in assets. Bear in mind, that most of those “assets” are in fact loans made to EU corporations, consumers and other EU banks.
When you are leveraged at these levels, you only need the assets you invest in to fall 4% before you’ve wiped out all of your underlying capital (€26 * 0.04 = €1.04).
At that point you are total insolvent.
As one can imagine, with most of Europe’s economy in the toilet, many of the assets owned by EU banks have fallen in value by over 4%. Fortunately the ECB doesn’t require them to accurately mark these assets at realistic values.
Today, Europe is not much better off than it was at the depth of the crisis in 2012. Using make believe accounting standards and buying your own bonds to push yields down doesn’t really solve anything.
Indeed, if you’re totally insolvent it doesn’t matter where interest rates are. At some point you’ve reached debt saturation: the point at which additional debt, no matter how cheap is of no value.
Europe hit that point many years ago.
So now Draghi is resorting to absolute insanity (negative interest rates) to try and turn things around. All that’s left is QE. But given the total failure that has been in the US when it comes to creating growth or forcing banks to lend, we don’t expect this to have much of an impact in Europe.
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Phoenix Capital Research
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