The European recession, which continues to steepen, has already caused the ECB's Mario Draghi to promise to purchase unlimited quantities of bonds with duration of 1-3 years on the secondary market. Mr. Draghi plans to "sterilize" these purchases by auctioning one-week term deposits to banks. But there are two problems with this form of sterilization. The first is there is no guarantee that private banks will hand over all of their newly printed money back to the ECB. Instead, they may choose to make loans to the private sector and receive a higher return, causing a rapid increase in money supply growth. In fact, recent term deposits have yielded just 0.01% and the ECB has stopped paying interest on excess reserves, so there just isn't much incentive to park a tremendous amount of cash at the ECB. And the second problem is that offering a one-week term deposit only removes money from the private banking system for seven days. It is not the same as selling a long-term bond to the bank. Therefore, the sterilization done by the ECB will only be temporary at best.
Turning to the U.S., last Friday's unemployment report left little doubts that the chronically sub-par employment condition is getting even worse. Not only were there only 96k net new jobs created but nearly one third of those jobs were in the food service sector. The all-important goods producing sector continues to operate on life support and actually managed to shed 16k jobs; despite the belief that we are in fourth year of recover. But the most disturbing part of the report was that 368k Americans became so despondent looking for employment that they gave up and left the work force; sending the labor force participation rate to 63.5%, the lowest level since 1981.
Therefore, the Federal Reserve under Ben Bernanke will make no such pretension towards sterilization. He simply wants banks to lend in spades and for the money supply to grow substantially. The Fed will most likely announce on September 13th a program to purchase a fixed dollar amount of Treasuries and Mortgage Backed Securities until the unemployment rate falls below 7%. He may also lower the interest paid on excess reserves.
However, the only problem with ECB and Fed money printing is that it has been tried for the last five years and hasn't worked. The unemployment rate in the U.S. has been above 8% for 43 consecutive months and EU (17) unemployment, now reaching 11.2%, continues to set Euro-era records with each new release.
In truth, a central bank has only one tool; and that is to systematically erode the confidence of holding the currency by increasing its supply. The ECB launched its plans for further money printing last Thursday and the Fed will officially announce their plans to launch QE III this coming Thursday. But these are just counterfeiting cruises to nowhere.
Central bank interventions are the reason why the desperately needed deleveraging process was cut short. They have acted as enablers for their governments to run up massive debts. They have brought about these never-ending recessions. They have caused energy and food prices to soar. They have eroded the incentive to save and invest and caused productivity rates to crumble. And they are the primary culprit behind faltering global growth.
No central bank has ever been able to restore solvency or create prosperity for any country. All they have ever served to accomplish is to wipe out the currency and middle class. These new central bank interventions are unprecedented in nature and will have a dramatic affect on your investments and the global economy.
