Try As He Might, Mario Draghi’s Magic Levers Just Won’t Create Growth

Phoenix Capital Research's picture

Mario Draghi is unhappy with the EU.


He’s not unhappy with the concept of the union; rather, he’s unhappy with the fact that EU banks are not lending money into the EU economy.


In Draghi’s imaginary world, bank lending = “growth.”


The reasons for this are A) he’s a former Goldman Sachs banker and so associates any and all bank actions with profits (which contributed to his wealth and power) and B) he has no understanding of how the real world works.


Bank lending only contributes to growth in a meaningful way if the capital is deployed effectively. If a bank lends money to someone to start a business (using the guy’s house as collateral on the loan), significant growth only occurs if the guy’s successful in deploying the capital to bring in sales.


If you don’t have sales, you don’t have a business. Without sales, our imaginary entrepreneur simply has an increased debt load that, if he fails to pay it back, could result in him losing his house.


Sure, he might hire some people to work for him using the capital from the loan to meet payroll. But unless his idea brings actual money through the door, these jobs, and his business (along with his house) will soon be gone.


Moreover, it’s not like the bank does well from the deal either. If the economy is in the dumps (as it is in the EU today) and the entrepreneur’s new firm fails, the bank is left with a foreclosed home that it can’t sell. And God forbid that home prices are falling at the same time (which they are in much of the EU) because the bank will be sitting on a deflating, illiquid asset that produces no return.


Capitalism is a tough game and success has little to do with capital or bank loans. According to Harvard Business School, 75% of all startups with at least $1 million in funding DON’T even return investors’ capital.


Put another way, three out of every four startups that convinced investors to give them at least $1 million in backing fail to even pay back the initial investment.


We’ve barely scratched the surface of how start-ups and the global economy really work, but already we’ve come up with multiple issues that reveal just how misguided and overly-simplistic are Mario Draghi’s beliefs in the importance of bank lending.


And this is the biggest problem with all Centrally Planned economies and monetary policies: they all reduce the world to a control room with various levers titled, “interest rates” “inflation” “QE.” Central Bankers seem to believe that it they pull various levers, growth will magically occur.


It’s a vision of reality so simplistic, you’d think a 10-year came up with it.  Anyone who’s actually started a business or created jobs knows a bank loan isn’t the key to success. Moreover, it's not like all bank loans are the same... or that cutting interest rates will only produce one particular desired outcome and no unintended consequences.


A bank loan is just money (well, actually it’s just debt). And if you cannot deploy that money in such a way that your returns exceed your debt payments, then you’re in fact worse off than you were if you’d simply not taken out the loan to begin with.


Draghi’s solution to this problem? Cut interest rates to negative so that you have to pay to keep your deposits at a bank. He believes that if rates are negative banks will be forced to lend.


To return to our control room metaphor, Draghi believes that he simply hasn’t pulled the magic “interest rate” level far enough (even though it’s already at the floor). So he drilled a foot into the floor and pushed the lever down into the hole.


We do not mean to single out Draghi as uniquely misguided. His counterparts at the US Federal Reserv or the Bank of Japan are no more attuned to economic realities. At the end of the day, a handful of Central Bankers are betting the entire financial system on their misguided theories.


No one knows how this will play out. We all know on some level that it will not end well, but exactly how and when it will all backfire remains to be seen. We’ve already had two epic Crises in the last 15 years. By the look of things, we’re heading for a third one in the not to distant future.


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research








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proLiberty's picture

As to the complaint that 3 out of 4 startups wasted the government money they were given, this is exactly why government should not be giving out money. The Kaufmann Foundation came up with a VC rule of thumb about startups: for every 10 that are funded, 2 or 3 will blow up, 1 will be a home run that achieves a successful liquid exit and the rest will be zombies, that is they are sustainable businesses but they never will be stellar to the level of attracting a buyout with a good multiple.

This is so much risk that it should be left to people who know what they are doing and who have their own money on the table.

Ghordius's picture

meanwhile, note the author's "Mario Draghi is unhappy with the EUHe’s not unhappy with the concept of the union; rather, he’s unhappy with the fact that EU banks are not lending money into the EU economy"

isn't that astonishing, that the author, after all those years, still does not grasp the difference between the EU, which has 28 member countries, and the eurozone, which has 18 member countries and a monetary policy based on the confederated efforts of 18 national banks led by the ECB?

and yet the author wants to very authoritatively write about the eurozone's monetary policy...

and look at this:

"Capitalism is a tough game and success has little to do with capital or bank loans. According to Harvard Business School, 75% of all startups with at least $1 million in funding DON’T even return investors’ capital."

is this the vision of the US capitalist? that "Small Biz" is the same as "startup biz"? it's a financial, or, better, financialist view, which might apply to the US environment, where Small Biz is either fucked with or gobbled up by megacorps and Wall Street. and ties in with the scandalous way the FED's chairwoman Yellen gives shorting advice about US Small Caps

I do hope that we in the eurozone will never have this view. I do hope that we will always remember that Rule of Law is best seen in how Small Biz is allowed to thrive, instead of being smothered, ruined and gobbled up by megacorp lobbyists and megabank's greed

Ghordius's picture

ZH's Tylers write the same: credit growth in the eurozone is negative, ergo everything is going down the drain

let me be clear on a few (warning: mixture of opinions and facts) points:

1. The Horse Is NOT Drinking. Debt is going down because the eurozone economy is fundamentally based on SMEs, and they, in general, are buying their debt back, particularly in the South where for example from the perspective of private households homeownership was always understood as owning 100%, not being mortgaged/leveraged

2. this goes back to how SME's see the current environment. is real, organic growth in sight? no? can you do something with your profits? no? then why not pay debt back, and so improve balance sheet health? you have to be a banker to hate this reaction

2. the eurozone's NIRP, for all it's negative connotations, is only effecting banks, it's only related to banks anyway. for all purposes, it's just a fee on banks to be paid to the ECB. and the biggest "cash parkers" are megabanks, not the small and medium retail banks. again, you have to be a (mega-) banker to hate, hate, hate that

3. we eurozoners do make a difference between megabanks and the rest of the banking (national) sector(s). that's also the reason why the Big Boyz will soon be regulated by the ECB and the thousands of others will keep being under by the national regulators. you have to be a megabanker to hate that

4. ZIRP is a courtesy of The Prime Global Monetary Mover, aka the FED. we can't have higher rates, here, we would be flooded by "Hot Money", way moar than we already are. no, thanks. of course, megabankers hate that

5. NIRP is something banks don't like. keep that in mind, the ECB is doing something that irks banks. not exactly what the FED would do, because the FED has a completely different relationship to the Big Boyz in general. again, you have to be a megabanker to hate that

6. nobody, and I really mean nobody notices that the ECB's balance sheet is shrinking. no, you are also not meant to notice. look away

7. the USD is going slowly down. why? well, a peg from a minor currency does slow down a descent. who is pegged to the USD? Among many, China. who is "soft flooring" to the USD? Draghi's EUR, with his remarks about 1.38. btw, the EUR itself is being floored by the CHF, and pegged by lot of other currencies. the whole shebang behaves like a lead weight tethered by balloons, all going slowly down. if they would stop pegging/flooring... we'd see some dramatic divergence

Joebloinvestor's picture

If you loan out enough money at zero rates, you are sure to have some measure of success (their thinking).

The problem is the successes will never cover the losses.

Dragon HAwk's picture

Aoooga... Dive Dive Dive.. ( there's a Lever for That )


astoriajoe's picture

I hope Mr. Draghi can find his special purpose.

Debt-Is-Not-Money's picture

"Central Bankers seem to believe that it they pull various levers, growth will magically occur."

Plunk your magic twanger frogeeeee!