Germany on Bubble-Watch


Peak Debt – Why The Keynesian Money Printers Are Done

Bloomberg has a story today on the faltering of Draghi’s latest scheme to levitate Europe’s somnolent socialist economies by means of a new round of monetary juice called TLTRO – $1.3 trillion in essentially zero cost four-year funding to European banks on the condition that they expand their business loan books.

(But it’s not working.)

Using anecdotes from Spain, … on the one hand, the initial round of TLTRO takedowns came in at only $100 billion compared to the $200 billion widely expected. It seems that Spanish banks, like their counterparts elsewhere in Europe, are finding virtually no demand among small and medium businesses for new loans. …

On the other hand, Spain’s sovereign debt has rallied to what are truly stupid heights – with the 10-year bond hitting a 2.11% yield yesterday (compared to 7% + just 24 months ago). …

Hedge fund speculators in peripheral sovereign debt do not care about … economies … They are (betting on) outright sovereign debt purchases by the ECB – that is, Bernanke style QE …

Today’s Spanish anecdote is just another proof that central banks are pushing on a string; … pumping money into financial markets even though the result is wildly inflated asset prices, not expanded business activity. …

Nothing has changed there since Spain’s 2012 fiscal and economic crisis. The nation’s unemployment rate is still above 20%, national output is still 7% below where it was six years ago and soaring government debt will soon slice through the 100% of GDP mark. … Spain is still saddled with the wreckage of a massively bloated development and construction industry, its government is led by corrupt fools who apparently believe their own lies about “recovery”, and its most prosperous province is next for secession voting. …

The carry trade gamblers … have piled into peripheral debt ever since the ECB chairman’s foolish “anything it takes” pronouncement. Yet it is only a matter of time before … Germany has vetoed (this, and then) the violent scramble of speculators out of Spanish, Italian, Portuguese etc. debt will be a day of infamy …

The apparatchiks who run our central banks seem to believe that the capacity of households and businesses to carry debt is virtually unlimited—–that there is no such thing as “peak debt” or a law of diminishing returns with respect to the impact of cumulative borrowing on economic activity. … But … the temporary prosperity leading up to the 2008 financial crisis was a one-time Keynesian parlor trick that used up the available balance sheet headroom and then some. …

Needless to say, Spain is but a microcosm of a worldwide condition under which maniacal money printers in the central banks are smacking up against peak debt in their domestic economies. As shown in the graph below, outside of Germany the debt disease has been universal. … Owing to massive expansion of government borrowing and debt ratios since 2009, total credit outstanding has now soared to 430 percent of GDP for the ex-Germany industrialized world. …

Central bank balance sheet expansion has lost its Keynesian magic entirely. Now the great sea of freshly minted liquidity simply fuels the carry trades as gamblers everywhere load up with any asset that generates a yield or short-run capital gain, and fund these bloated positions with cheap options and repo style finance.

But here’s the obvious thing. Central banks can’t normalize interest rates – that is, allow the money markets to rise off the zero-bound – without triggering a violent unwind of the carry trades on which today’s massive asset inflation is built. On the other hand, they can no longer stimulate GDP growth, either, because the credit expansion channel to the main street economy of households and business is blocked by the reality of peak debt.

(Read the rest of the article, with charts)

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About icliks

Biding my time in central ms ... yours too, if ur reading this.
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