Central Bank Bazookas Open Fire
A few weeks ago, UK Prime Minister David Cameron urged European leaders to wheel out their big bazooka to tackle the eurozone debt problem
. Thats mighty impressive language a bit reminiscent of the shock and awe terminology that preceded the last Gulf war. The only problem was that I couldnt find any decent explanations at the time in the regular news and media outlets of exactly what Mr. Cameron meant by the phrase big bazooka.
In the absence of any authoritative reporting on the matter, I could only fall back on my gut feelings about what politicians of all stripes usually like to do when backed into a financial corner. What our PM really meant, of course, and what the cowed and controlled mass media was too frightened to report, was that the ECB should be given the same dubious money-printing powers that our very own Bank of England currently abuses sorry enjoys and seems happy to wield with abandon. Unfortunately for Mr. Cameron, however, the Germans, who hold the European purse strings and who are still haunted by memories of the 1920s hyperinflation of the Weimar Republic said a definite nein to this idea. Theyve been there, done it and got the extremely over-priced T shirt to prove it.
German Chancellor Angela Merkel may have thought shed spiked Mr Camerons guns with her firm rebuttal, but a week is a long time in politics and a few weeks is an eternity. Its become increasingly apparent during that short period that the deflationary battalions, having already overrun the eurozone periphery, are now massing on the borders of the core countries themselves. Even so, Mrs Merkel refuses to recognise this existential threat to the future of the eurozone and, by extension, the stability of the global financial system. In the end, the Anglo-Saxon controlled financial establishment felt they could stand idly by no longer and decided that if Mrs Merkel wouldnt act to bail out Europes insolvent banks, they were going to have to act for her.
So thats why, this past Wednesday, we saw the Western worlds central banks unleash the first salvo from their bazookas, flooding the ailing European financial institutions with extra liquidity. This action, of itself, is in no way sufficient to solve Europes debt problems, but it certainly sends a message of intent. Basically, the Western worlds politicians and central banks peered into the abyss and decided they didnt like what they saw. In fact, one rumour has it that this latest intervention was prompted by fears that a major European bank was about to fail.
It seems the Western central banks had also recruited an unlikely ally in the Peoples Bank of China, which decided to open a Far Eastern front in the war against deflation. Last Wednesday, in a coordinated pincer movement with the Western financial powers, China reduced funding requirements for its banks by 0.5%, thus freeing up more capital for investment.
So what happens next? Well later this week (8th and 9th of December) we have a key European Summit in Brussels during which the Germans intend to set out the conditions they require before theyll agree to any kind of inflationary pump-priming.
Increasingly, its looking like a deal of some kind is about to be stitched together whereby Germany demands and receives far greater control over the spending plans of fellow European states, thus giving cover for the worlds central banks, this time joined by the ECB, to unleash a veritable money-printing blitzkrieg to try and cow the forces of deflation.
So the big questions for us as investors are will the markets find this grand plan convincing and if so, will it actually work? Will the central banks bazookas have enough firepower to overcome the deflationary menace or do we wake up one morning to be confronted with a wasteland of closed down banks and empty supermarket shelves?
Nobody knows for sure, but my feeling is that governments and central bankers, after their initial skirmishes, are now panicked enough to turn up the printing presses to full speed and engage in total war against deflation. This strategy might fool the markets for a few more months yet and we could be in for quite a strong rally in the stock market over the festive period.
In the longer term, however, I fear we could end up with some kind of catastrophic hyperinflationary depression and the only investments likely to benefit in that situation will be food, energy and the precious metals. In such conditions though, getting a return on your investments will probably be the least of your worries.
by: John McDonald
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