Sunday, September 9, 2012

All hype, no bite

Mario Draghi is about to unleash another round of 'money printing' through massive bond purchases in order to stave off the collapse of the euro. He has pledged to do whatever it takes to save the euro. If his pledge is indicative of the future of the euro, then the dissolution of the euro is nigh.

To appease the Germans, who for unfathomable reasons have a morbid fear of inflation, he will sterilise whatever 'money printed' by taking in an equivalent amount in deposits from banks. This clearly shows that Draghi doesn't understand how central banking works. Central bankers actually have no power to create money! Whatever bonds or loans that they purchase must be funded by somebody. Only if central banks can issue their own bonds, can they create money but they don't have such authority. As a result, they must borrow from the banks by taking in their deposits.

Therefore whether Draghi will sterilise or not isn't his choice because whatever Draghi, Bernanke or Bank of England's King does will always be sterilised. Their bazookas can only fire blanks. When truth will out, they will be derided as the Three Stooges of central banking.

Warren Buffett has cautioned us to be fearful when others are greedy. No, we should be fearless instead. As suckers rush in to load up on equities upon hearing of Draghi's pledge, now's the time to unload all your equities. Or if you miss this one, you can wait for Bernanke's pronouncement which should be due anytime soon.

All the obstacles to delaying the depression are now being removed. The Eurozone is still trapped in its balanced budget ludicrousness. Germany is finding itself dragged into the vortex of the Southern European downward spiral towards economic and political oblivion. The Catalans and Basques are clamouring for separate statehood from Spain. Pretty soon, many supposedly homogeneous states will find that they actually have many ethnicities.

The US is being entertained by two presidential contenders, both fraudulently promising the voters of their ability to revive the economy when the powers to do so are in nobody's hands. Of the two, Romney would hasten the collapse of the US economy since he would run the economy as he did Bain Capital. The traits needed for a successful businessman are incompatible with those of a great statesman. You run a business to make profits but you can't run a nation to avoid deficits unless your nation is a city-state that derives the bulk of its GDP from exports. Only if the state suffers a deficit can the households save and the businesses profit. If the state also wants to reap a surplus, then misery will be the lot of the households and businesses.

In the East, Japan is making a turnabout towards almost zero deficit after 20 years of continuous deficits, not realising that it is those deficits that have prevented its economy from keeling over. China will need to awaken Mao Zedong from his deep slumber in order to keep the country as one.

The fact is all governments are running out of bullets. With their ability to stomach further deficits stretched thin, this last line of defence is about to give in.

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