Does Mario Draghi have what it takes? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 August 2012
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Paris, France

The Dow lost $64 yesterday. Gold dropped $9.

What this appears to mean is that the markets are losing confidence in Mario Draghi's pledge to do 'whatever it takes' to keep prices up. In fact, they're beginning to doubt that Mario has whatever it takes.

Which makes us wonder: what does it take?

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Haven't the central bankers put their hearts and souls into it? Haven't they pulled out all the stops...plugged in all their tools...and called in all their experts?

Didn't they give it a good college try? More like a major, Ivy League university effort!

You can hardly fault them. They've tried just about everything...except what works.

As for Draghi, it's not the spirit that is lacking. It is the means. He may very well want to hoist European markets just like Ben Bernanke did in the US - with an open ended "put option" that girds both the stock and the bond market. Then, maybe Draghi too will be declared a hero.

Trouble is, what it takes is the authority to print an unlimited amount of currency. That way, lenders are sure they will get their money back. No question about it.

But that is something Mario Draghi doesn't have. So far, the Finns and the Germans at least haven't gone completely mad. They cling to a few old verities - such as: it's a bad idea to print huge quantities of money and give it to people with sunnier weather and shadier finances.

Sooner or later, though, the Northern Europeans will probably get with the program. Because, if they don't, major banks...and even sovereign nations...in Europe will go belly up. Even in the freezing north, policymakers won't want that on their resumes.

But even if Draghi had the authority to conjure up as much cash as he wanted, he'd still be in trouble. The old cash trick works once or twice. Then, it begins to lose its magic - when people realize that it doesn't get the job done.

That's the hole Ben Bernanke is in now; it's the one Mario Draghi is aiming for. But once in it, it's hard to get out gracefully. You can print money; but you can't cause a real recovery.

"Heat Rises on Central Banks" the Wall Street Journal reported yesterday.

This week, both the ECB and the Fed are in the spotlight. Draghi promised a big bazooka last week. Now, investors want to see it. If he doesn't come through, the markets are likely to be disappointed. And then Draghi will look like an idiot.

"The more news comes out," writes Yves Smith at Naked Capitalism, " the more it looks like Mario Draghi's pledge that the ECB would do all it would take to save the Euro was a bluff..."

Back in the USA, Ben Bernanke is still a hero to most people. As far as they can tell he saved the US from a terrible depression. No matter that the US needed a depression to eliminate its outsize debts. And no matter that if we had been allowed a quick, sharp depression following the crash of '08, we would now probably be in full recovery mode.

But for the moment, Ben Bernanke still wears his hero's medals proudly. The Dow is still over 13,000. And growth is still positive - though barely.

Still, taking the world as a whole and central bankers as a group, things don't look so good. Europe is in recession. Japan is heading towards recession. And so, it appears, is the US. China is just slowing down ...but could tip into a dangerous period of debt de-leveraging at any time. As for Britain, the Economist reports:

THE British economy continues to get smaller. New data from the Office of National Statistics (ONS), released this morning, show that GDP fell by 0.7% in the second quarter of 2012 compared to the first quarter of the year. This adds another bad data point to cap a terrible five years...

So, central bankers are feeling the yearning masses cry out to them: "Touch me...heal me..." the crowd implores.

But what can they do? What does it take? Is the situation hopeless?

Tune into 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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2 Responses to "Does Mario Draghi have what it takes?"

praveen Bhargava

Aug 1, 2012

The economic problems in Euro-Zone are since 2008-2009 slowdown but on a lower scale.Now for the last 2 years in the effort to get Euro-Zone out of the grip of the Sovereign Debt trap of the PIIGS Nations who have about 5-7 Trillion USD Debt,the so called rich Euro Nations as well as ECB and IMF have,by all means,failed in their efforts to save EURO-Zone.More and more Stumulus packages given for more growth as well as more employment shows negative results and put these PIIGS Nations in much more Debt trap.
Now the Euro-Zone economically turned into such a grim situation that it is now very difficult for any nation of Euro-Zone to put any amount to save these countries.Mario Draghi,the chief of ECB is also not find himself to help them financially through put more fund to PIIGS Nations in the present critical economic situation through ECB,EFSF and/or IMF.
The days are not far for a real out-brust of the EURO-ZONE in the shape of separation of few PIIGS Nations, Fall of EURO from common Euro-Zone currency,Devaluation of EURO by atleast 20%,Much more Banks to shut doors and more unemployment above 23%.

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Gopalan

Aug 1, 2012

Despite the pessimism and gloom on growth worldwide, isn't a quiet revolution taking place in the US where we understand gas is replacing oil which could turn around oil-based inflation and put US back into its glory years and spearhead turn around in world economy ? Would be grateful for very considered view,even refuting this thought, from some kind wise counsel.Many thanks in advance.

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