Thursday, December 8, 2011
Draghi giveth and Draghi taketh away
Draghi giveth and Draghi taketh away.
First the monetary part...
Today the ECB/Draghi came out with extending nearly free, unlimited euros for banks for three years (a bit longer than expected), looser collateral rules (lower rated, riskier assets can be used) and a cut from 2% to 1% capital requirements. There was an initial relief rally.
But then Draghi followed it up with this...
Statements in which he basically implied that no major sovereign buying by the ECB is forthcoming. In addition, he said that "lending money to IMF to buy Euro bonds is not compatible with the treaty."
So where does that leave us?
It leaves us in an environment where European leaders truly believe that the problem is with the deficits and that the deficits have to be brought down to “normalize” national bond markets. Their prescription is more of the same—austerity—which has done nothing but collapse economic output and INCREASE the size of deficits.
With these policies it is safe to say that Europe has entered in a vicious circle down, which will eventually culminate with “blood in the streets” as all economic collapses do.
Wasn’t it Barron Rothschild who said, “Buy when there’s blood in the streets?”
But not before!
As for the U.S. there is strong reason to believe that we are decoupling from Europe as deficit spending remains high enough to sustain economic growth around the 2% level. In addition, households’ rising propensity to take on debt and banks’ willingness to provide that credit, can help sustain momentum in the economy. If we can get the payroll tax extension and unemployment insurance extension out of the way, it looks like 2012 can be a decent year and that's likely to help Obama.