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CHECKMATE: THE EU’S BANKING & QUANTITATIVE EASING (QE) DISASTER
By Preston Pysh
This isn’t going to be a long post because there’s not much to say on the matter. In short, I think the global economy has placed the European Central Bank (ECB) in a checkmate position.
During the past credit cycle, we’ve just about seen everything. Starting in 2008/2009, the US kicked off the disaster with unprecedented amounts of quantitative easing (bond buying by central banks to manipulate interest rates), pushing the value of the dollar into very depressing levels. As the credit cycle continued, each US Stock Market pullback was closely followed by yet another round of FED quantitative easing. This worked out well for other foreign countries as the US was effectively providing liquidity to a global economy that was strapped for growth. This “growth” began to stall near the end of 2014 when the FED finally decided to turn off the fire-hose of money injections into the global economy. As many remember, this is the point where the European Central Bank decided to pick-up where the US left off. Additionally, the Bank of Japan joined the ECB and conducted quantitative easing at such ridiculous levels that they called it QQE. As the US FED decided to start signaling a tightening of credit through the federal funds rate, it came as no surprise the value of the dollar came screaming back. This was an interesting dynamic throughout the past 8 years, but I’m of the opinion that much of the crazy we’ve experienced globally is about to get even more exciting/terrible. Here’s why.
In Japan and in Europe, we’ve seen central banks implement so much quantitative easing that they’ve managed to push interest rates literally into negative territory. In short, this means people are willing to put cash in the bank only to get back less cash at a later time. If you’ve stopped reading to try and figure out that last sentence, just keep reading, you’ll never make sense of it. Billionaire Warren Buffett might describe this as a bird in the hand is worth 0.5 birds in the bush. Regardless of whether it makes sense or not, there’s a disturbing impact that all this interest rate manipulation is having on big banks: They are struggling to remain profitable if interest rates are polarized to zero/negative percent. Nowhere is that more apparent than in Europe. In an interesting government/private industry debate we are starting to see some of the key leadership within huge banks vocally lambast the chairman of the ECB because he’s destroying the sector with toxic monetary policy actions. From the ECB’s perspective, they are trying to stimulate growth in the European Union. Unfortunately for them, the only tool they control is monetary policy. As a result, their ability to use other tools (like fiscal policy) to induce spending/growth is not even an option. In fact, even if they could persuade the leaders of the EU to implement drastic fiscal spending policies, there’s an enormous conflict of interest among countries within the Union. Take Germany and Italy for example. One is drastically more responsible than the other – financially speaking.
So where does all this leave us? Fiscal Policy is out due to the conflict of interest among participating countries. Monetary Policy has polarized interest rates to zero or negative percent. Too big to fail European banks are potentially on the brink of becoming insolvent. European stock investors (minus bank owners) are screaming at the ECB to conduct more QE (the heroin) to keep asset prices intact. And ordinary citizens are aimlessly searching for yield where the upside is bound at a few percent and the downside is likely double digits. Good luck.
As I look at Great Britain’s attempt to try and remove itself from the EU, I can’t say I’m surprised (here’s more information on that).
It’ll be interesting to see how all of this plays out in the coming quarters. As always, your comments and counter-arguments are highly encouraged!
-Preston
