There’s so much confusion in the short term markets regarding QE and its ilk, that it’s easy to get whipsawed into oblivion – or at least complete frustration. You must maintain a steady fix on the big picture. Regardless of what the mainstream media experts would have you believe, none of the problems of the last four or forty years have been solved. In fact all of them are now worse.
We live in a period of unprecedented global debt. As Margaret Thatcher famously observed: the problem with socialism is that eventually you run out of other people’s money. Well here we are. We are now officially out of money and only artificially low interest rates are allowing the music to continue. But where to from here? QE or not QE?
Every market and every trade now hinges on attempts to read the tea leaves left behind by the Federal Reserve and its central banking brethren. Market forces, fundamentals, earnings, etc. are all irrelevant in a centrally planned global economy. The only question that remains: what is the future value of government money?
There are several ways to attempt to answer this question. We can look at history for examples, we can study human nature, or we can listen closely to what George Soros says about the Euro.
The following 19 minute clip reveals much about the future of money printing in Europe, and by extension, the rest of the world.
But first he breaks out Paulson’s bazooka and warns that a failure to save the Euro would lead to an end of the common market and the European Union itself, leaving the continent in a potential state of warring nations. This must be avoided at all costs.
“You first somehow have to get back to normal. In other words you have to invent some nonexistent device that will get us back to… closer to the Maastricht criteria. And that’s normally what central banks are supposed to do… to preserve the system. And in a crisis they sometimes do things they’ve never done before… and I think that that is the only way.”
Preserve the system, the system being one in which the central banks control all of the debt and all of the money creation. They have the power to save themselves and they will use it regardless the cost to everyone else. If that’s not clear enough an answer about the future of QE, then this should clear it up:
“A sovereign that can print the money can’t default. It will never default”
The real challenge the central banks face isn’t what to do, but how to do it such a way that the public will accept a “solution” that the public pays for via a reduced standard of living. In other words, it must me marketed with a sufficient level of obfuscation that plain old QE no longer provides.
Soros puts on his thinking cap and comes up with a potential (temporary) solution. How about creating a holding company to run a fund that purchases some of the debt using the ECB’s seignorage rights? The average Joe might have figured out QE, but good luck sorting through that one.
When asked whether his proposal complied with the letter and spirit of the law which prohibits the ECB from purchasing government bonds (monetizing the debt). He explained that there is no problem as the holding company is not the ECB but rather the ECB shareholders. Got that? Good.
And as a final word of warning, Soros breaks out the old central banking chestnut of “driving Europe into this deflationary debt trap.” But remember that deflation to a banker has a very specific meaning – the writing off of unpayable debt at the expense of the bank’s bondholders. In other words, deflation is nothing more than the free market ridding itself of failed banking institutions. Once you understand this basic fact, it’s easy to grasp the implications of Soros’ observation that, a sovereign – or more accurately, a central bank – that can print it’s own money, can’t default.
It’s QE to infinity as Jim Sinclair says.