Prepper Recon

Breaking News! ECB Monetizing Debt

Mario Draghi has just announced that The European Central Bank or the ECB will be buying bonds. This is an unprecedented action by the ECB. Up to this point, members of the Euro Zone, primarily the Germans, have rejected the idea of bond buying programs. When a central bank like the ECB buys bonds, they do so with currency that is created out of thin air. This is what the US Central Bank, the Federal Reserve do regularly. By creating more money, the monetary base or M-O money supply increases. This creates inflation as you now have more currency competing for the same amount of goods and services.

This action will likely diminish the value of the Euro. As we have seen today, it will also make hard assets like gold and silver more attractive. At the time of this writing, gold was up $10 to $1705 and silver was up $.33 to $32.60. The devil is in the details as to what may actually comes out of today’s announcement, but it represents a fundamental shift in policy by the ECB. This will have dramatic effects to global markets in the long run.

Why did the Germans cave in?

Germany has been the best looking house in a bad neighborhood for a few years. They have been responsible with their spending and maintained a strong economy as a result. Other countries around them like Spain, Italy and Greece have squandered their wealth in wild living. They have given away hoards of cash in social welfare programs and young retirement age while failing to generate the required revenue to support such spending sprees.  These countries are now teetering on the brink of  collapse and the spill over will have devastating effects on Germany.

In an article by CNBC written Monday, the problem in the Spanish banking system is covered in some detail. Spaniards have lost confidence in their government to handle the sovereign debt problem. They fear a Greek type meltdown in their own economy.  The Spanish see the possibility of a Euro Zone exit and return to the Peseta as an independent form of currency. It is expected that  the Peseta would lose 25- 50% of its value against the Euro within the first year of the exit. This fear has driven Spanish depositors to withdraw savings en masse. The numbers for August have not been finalized or released, but they withdrew the equivalent of nearly $100 billion USD in July. Under the fractional reserve banking system, this destroys nearly $1 trillion in wealth. An explanation of the fractional reserve banking system is beyond the scope of this article, but I promise to write a full explanation of it and the hazards it creates in the next 2 weeks, so stay tuned.

A credit contraction of this magnitude is certainly wreaking havoc on the Spanish economy and threatening to spread a crisis of confidence through all of the struggling Euro Zone countries. I believe the Germans have come to terms with the fact that there is no other way out of this crisis. However, it is not a cure. It is, in fact, only a mechanism for kicking the can down the road and causing the final day of reckoning to be worse. With this year’s French election, the Germans lost their only ally in the fight for fiscal responsibility. With the election of new French president Hollande, France voted against austerity and joined the ranks of the rest of the drunken Euro spending festival.

I also suspect there was a back room meeting similar to the one we had in DC in 2008 where Hank Paulson and Ben Bernanke told members of congress if they didn’t pass this bail out, they should expect something resembling a zombie apocalypse in the next  week. Nothing like the undead to scare you into doing the right thing. A continued run on the Spanish banks would create a scenario just short of this threat. I doubt German Chancellor Angela Merkel has any greater affinity towards zombies than the rest of us.

Here is quick video on the ECB decision. It is about 6 minutes.