The ECB launched its QE program this week, proving once and again that the Central Bankers are clueless as to how to create any growth.
There is no evidence that QE is capable of generating GDP growth or employment growth.
1. The UK launched a QE program equal to 24% of its GDP. Neither GDP nor employment moved significantly.
2. The Bank of Japan has engaged in QE programs equal to over 50% of its GDP in the last few decades: both GDP growth and job growth remain anemic there.
3. And in the US, the Fed’s own research shows that its $4 trillion in QE only lowered unemployment by 0.13%.
So why are Central Banks launching QE?
The answer is simply, to try to stop the bond bubble from exploding.
First of all, this bubble is larger than anything the world has ever seen. All told, there are $100 trillion in bonds in existence.
A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.
The size of the bond bubble alone should be enough to give pause.
However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.
To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).
This is why Central Banks have cut rates to zero or even negative: they are trying desperately to keep insolvent countries from defaulting on their debt. Should interest rates rise, then very quickly numerous nations would be bankrupt.
At that point you’re triggering a collateral shortage and margin calls on those $555 trillion derivatives.
By the look of things, we’re not too far off from this. It’s only March of this year and already we’ve seen over 20 interest rate cuts from Central Banks around the world. These are not moves designed to generate growth… these are acts of desperation.
Interest rates are NEGATIVE on two-year bonds in seven different EU countries alone. Globally, bond yields on nearly 50% of sovereign bonds are below 1%.
Yields can always go lower… but at some point investors will have to ask, “how much am I willing to pay the Government to sit on my money? 1%? 2%? 3%?”
Eventually there will be a bond market revolt. When that happens, the next round of the crisis… the round to which 2008 was a warm-up… will hit.
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