- Published on Tuesday, 07 August 2012 13:48
- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 348
As long as they keep printing, all will be fine. But what happens when they stop?
This message is one of a series. It began when Mario Draghi, former Goldman man and now head of the European Central Bank, promised to do "whatever it takes" to save euroland.
The issue on the table: Whatever does it take to bring a real recovery?
First, whatever it takes, Draghi didn't seem to have it. Or maybe he did. The situation in Europe is so complicated it's hard to tell. So investors have been fearful one day and cheerful the next. At the beginning of last week, they thought all was lost. Then, by the end of the week, stocks were rallying again. The Dow rose more than 200 points on Friday. Yesterday, it still had some forward momentum... going up another 21 points.
What does Draghi have? This report from British newspaper the Telegraph, which has been hard on the story from the start, suggests that at least Draghi has something:
Mr. Draghi has secured a mandate for "unlimited open-market operations," a far cry from the half-hearted and self-defeating bond purchases of the last two years. The ECB at last has a license to act with overwhelming force, like the U.S. Federal Reserve.
"Overwhelming force" is what Ben Bernanke has, which is thought to be the same as "whatever it takes." But is that enough? What force do central bankers really have? All they can do is provide the markets with more cash and credit.
And even if they give it all they've got, that still won't be enough to cause a real recovery. Because you can't cure a debt crisis with more debt. If you could, no one would ever bother with austerity.
Households, governments, businesses -- faced with too many debts and not enough money -- sooner or later have to straighten up, reduce spending and reckon with their bad debt.
On the other hand, we've never heard of a counterfeiter who failed to pay his debts. And since the Bank of Bernanke has the power to print money, investors are inclined to give him and the U.S. some slack.
That's the Big Bazooka Theory in a nutshell, where it belongs. And here's a forecast, too: This is not a formula for a healthy economy. Nor does it bring a recovery. It's only a formula for blasting the can so far down the road that most investors and savers can't see it... and therefore don't worry about it.
As for Mario Draghi, we don't know. He may have the power to use unlimited force. Or he may not.
According to the theory, your bazooka can't be just big; it has to be infinitely big. Because the only way you can hold off a default is by promising to print an infinite quantity of cash.
And you have to mean it.
If you just print up a few hundred billion euro or dollars or renminbi, speculators take out their calculators. If they see that you're a little short, they sell your bonds, fearing you will default. Then other speculators buy them at low prices, betting that you will print more of whatever it takes. Then, when you do print more, prices soar and the speculator sells the bonds back into the market...
And the entire process repeats itself... until you finally default.
As long as the amount you print is limited, speculators can look ahead and see when it runs out. The only way to end this speculation against your bonds is to say: "Don't bother selling my bonds. I'll print an infinite amount to protect them."
Then the whole drama goes away. Savers and investors just want to know they'll get their money back. Your willingness to print, completely unrestrained by law or common sense, reassures them.
In fact, in today's world, they'll buy so many of your bonds that your interest rates will fall below the level of consumer price inflation (which is usually falling too)... making the real yield negative! In other words, if you agree to act like a damned fool, they'll lend you money and ask for no real yield.
That's because you will have "whatever it takes."
All of which is passing strange. But highly amusing.
But it still leaves us with the question: Whatever does it take to bring a real recovery? This is the question we teased you with last week. And that is the question we leave you with today.
Tune in tomorrow for the answer.
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