In 2012, during the depth of the EU banking crisis which nearly took the entire EU financial system down, Mario Draghi stated that he would do “whatever it takes” to hold the EU together.
Anyone paying attention knew that this was a bluff. True, the ECB and EU leaders had already defied if not broken every condition of the Maastricht Treaty and the Schengen Treaty (the legislation that formed the EU proper). However, even to the most cynical analyst, Mario Draghi’s claim was pushing the envelope a little too hard.
Implementing capital controls and border controls limit freedom, but from the perspective of monetary policy, they’re secondary items. The REAL power is that of the printing press.
This is how Draghi’s promise to save the EU was different from every other action: it addressed the structure of the EU in its most critical component, namely the control of the currency.
It took the EU two years to cobble together its reasoning for how something that went completely against the Maastricht Treaty would be permitted. As usual it was the Germans (the ultimate holders of the purse strings) who gave the “OK.”
Now given the green light, Draghi has embarked upon a €60 billion a month QE program. Somehow this is meant to:
1) Reboot a €46 TRILLION banking system that is totally insolvent.
2) Generate lower interest rates when most EU-member sovereign bonds are at multi-century lows.
3) Bring the EU economy back to growth.
The whole idea is absurd. But it does reveal one important thing: that we are much closer to the end of the Central Bank-fueled $100 trillion bond bubble than ever before.
The bond market has tripled in size in the last 14 years. This has been fueled by the issuance of debt at an astounding pace as Governments attempted to paper over the massive decline in living standards plaguing the West.
Today, the bond bubble is over $100 trillion in size. When you include derivatives based on interest rates (bonds) it’s over $555 trillion.
To put this into perspective, the CDS market which nearly took down the financial system in 2008 was a mere $50-$60 trillion in size. So the bond bubble is literally 10X this in size and scope.
The derivatives story is key here, because all of those $555 trillion in trades are backstopped by sovereign bonds (Japanese bonds, German Bunds, US Treasuries, etc.). These are the very bonds that Central Banks have been BUYING over the last five years (thereby shrinking the amount available to the banks to backstop those trades).
Put another way, the amount of high quality collateral backstopping this mess has shrunken dramatically. On top of this, traders have been piling into sovereign bonds in anticipation of various QE programs, forcing yields to multi-decade if not multi-century lows.
Currently over HALF of ALL Government bonds in the world yield less than 1%. Over $5 trillion in government debt has negative yields:
This is not only unsustainable… it is a clear sign of a bubble. A bubble that when it bursts when involve over $555 trillion worth of trades imploding.
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Phoenix Capital Research