ECB Begins Bond Buying Program
The 19 month plan by the ECB to buy sovereign debt started on Monday March 9th. The plan will be to inject 1.1 trillion euros into the economy. According to a Bloomberg article, purchases will include bonds from at least 5 different countries with individual trades ranging from 15-50 million euros. (Source: Bloomberg 2015/03/09)
Some parts of the program still need to be agreed upon. According to Bloomberg, the policy makers have failed to reach a conscious on how to share losses from buying bonds with negative yields. About a quarter of the 346 securities in the Bloomberg EuroZone sovereign bond index trade with a negative yield.
Interest Rates are Already at Record Lows
Bloomberg data reports that securities from Austria, Belgium, Germany, Finland, France, Slovakia and the Netherlands trade with negative yields. So it looks as though the ECB and the 19 National Central Banks need to work out certain details as the program gets kicked off. The complexity of the plan raises questions about whether or not it can be successful.
According to a Business Insider article, the ECB will directly buy 8% of the bonds in the program leaving each countries Central Bank to buy the rest. Greek bonds will be excluded until at least July which is when Greece is scheduled to pay back debt from the previous bailout. (Source: Business Insider 2015/03/09)
So now over the next 19 months the ECB will be buying 60 billion euros of debt every month. The objective of the QE program will be to prevent deflation and stimulate the EuroZone economy. With interest rates already at record lows, pushing bond yields even lower will not result in a sustained recovery.
Asset Inflation vs Deflation
One of the paradoxical things about the new measures by the ECB is that the Central Bank is claiming that QE is needed to fight off a deflationary problem in the economy. Yet stock indexes in many parts of Europe are already trading at or near all time highs. Real estate prices in some regions have also been on the rise. So more money printing will likely only further distort asset valuations.
The big problem the ECB has is that QE will do nothing to address the long term debt problem that plague many EuroZone countries. While injecting over a trillion euros into the economy may give a short term boost, it will ultimately sow the seeds for the next crisis.
With Central Banks thinking they need to constantly intervene at every level of the economy, owning Gold and Silver in our view has never been more vital.
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