Will Draghi's QE plans help the Eurozone?

Jan 23, 2015

- By Bill Bonner

Bill Bonner
Rancho Santana, Nicaragua

Dear Diary,

Dow up big - 259 points.

Gold up too - over $1,300.

2015 is going to be a hoot. Boom...Bust...Lies and Claptrap...we're going to have it all!

What accounts for yesterday's big bullish surge? Bloomberg:
    Emerging-Market Stocks Gain on $1.3 Trillion ECB Stimulus

    The MSCI Emerging Markets Index added 0.8 percent to 983.53. Russia's dollar-denominated RTS Index rose the most in the world and the ruble strengthened as the ECB's move encouraged investors to buy riskier assets. Gauges in Poland, Hungary and the Czech Republic increased at least 0.9 percent. Oil producer Petroleo Brasileiro SA led gains in Brazil. Asian stocks jumped as China pumped funds into the financial system.

    ECB President Mario Draghi unveiled a quantitative easing plan of 60 billion euros per month until at least the end of September 2016. The move, which is intended to counter slowing growth and the threat of deflation, may spur capital inflows into developing countries. China's monetary authority used open-market operations to add cash to the financial system for the first time in a year and spurred loans amid a fund shortage.

Will this bold move help the Euro economy? Will it make Europeans richer, happier, better lovers or better sportsmen? Not if it works like the US version.

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The funniest part of this story is that Draghi made his announcement with a straight face. What a comic. A real Leslie Nielson. As we saw yesterday, the typical American is actually poorer than he was before QE programs began.

But all over the world, speculators are running wild. In a single day, following Mr. Draghi's announcement, they made a cool $1 trillion worldwide.

Where does this money come from? Corporations are really not worth a penny more than they were on Wednesday. Why would they be? All that has happened is that the European Central Bank has pledged to use money it doesn't have to buy assets that are already extraordinarily expensive. Bonds from Italy, Spain and France are already priced at levels never before seen in human history. On the evidence, never have investors had more faith in European governments' ability to pay...or more faith in the currency in which their obligations will be honored.

This alone makes our mouth drop in awe and wonder. Never before in history have these very same governments been so deep in debt with so little prospect of ever paying it off. And never before have their central bankers been so openly committed to devaluing the money they are supposed to be protecting.

All of which is mind boggling...or extremely funny. Or both.

Europe's QE program is supposed to "counter slowing growth and the threat of deflation." How does Mario Draghi know how fast an economy should grow? How does he know what prices should be?

Oh...we are being mean spirited to ask. It's like asking an aging prize fighter if he really needs another blow to the head; we're just making fun of him.

Yes, another giant money-printing scheme is underway, this one in Europe. This will put two of the world's biggest economies - Japan and Europe - in full credit-pumping mode.

The dollar goes higher. American chests fill with pride, apparently unaware that they are losing the 'race to the bottom.' Their exporters will find their sleds rubbing up against hard stone and soft mud. Especially, their oil exporters! For the price of oil has dropped in half in the last 6 months.

According to Larry Kudlow, America enjoys the equivalent of a "giant tax cut," thanks to low oil prices. Nine months ago, he said it was enjoying an "economic renaissance," thanks to high oil prices (which brought a boom in the fracking states). What a great time to be an investor. Silver linings everywhere - with no clouds. And when you are riding your bike, all roads are downhill.

Yesterday, we promised to tell you why the middle classes have lost ground. It barely seems possible. America is the crown of capitalism, isn't it? And doesn't the 21st century - which we live and breathe every day - carry in its balmy air the elixir of growth, progress, and riches beyond our imagination? How is it possible...with so many more lawyers...so many more economists...so many more public servants - striving, sweating, straining to make life better for us all - how is it possible that we have less real, spendable wealth than we had before the century began?

We are staggered by the question.

And once we recover our footing, we will come up with an answer. It is too big a subject to tack onto this Diary entry, but we will give a hint by asking another question:

Who actually makes life better? Who actually adds to humans' wealth, happiness, and the quality of their lives?


Government employees?



Is it the people who say they are working to create a better world - like Barack Obama in his State of the Union address:
    "...helping working families feel more secure in a world of constant change...That means helping folks afford child care, college, health care, a home, retirement -- and my budget will address each of these issues, lowering the taxes of working families and putting thousands of dollars back into their pockets each year."
Or is it another class of people altogether...people who are too busy turning out products and services to feed you a line of BS?

You can guess. But you may not know that those people are disappearing...more about them, tomorrow...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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