17 March 2015

Euro Weaker as ECB Stimulus Plan gets under Way

As the ECB stimulus plan gets under way one clear result is that the desire for a cheaper Euro is coming to fruition. Currency traders have devalued the Euro by 13% this year and 3% last week. (Source: The Fiscal Times) Stock traders have also responded with enthusiasm pushing European stock indexes up by about 10% to 20%. So far QE has helped weaken the Euro and further inflated stock prices.

In a recent article in The Fiscal Times, Jens Weidmann, head of the German Bundesbank said “Cheap government financing conditions should not cause governments to believe that further reforms are not needed” (Source: The Fiscal Times 2015 March 16th) However, most Central Bank stimulus programs have come without much reform to the financial system.

Positive Effects of QE will not Last

The one thing that has been learned about QE programs is that they are effective in inflating assets prices. However, much of the money that the ECB is using to buy bonds will not likely find its way into the real economy. So while there will be a temporary boost for asset prices the stimulus measures will not create a sustained recovery. 

In a recent article in Business Insider, Investment manager Jeffrey Gundlach said, "Central Banks around the world have put together a lot of intricate policies. Ultimately, the tower will not be able to stand". (Source: Business Insider 2015 March 10th) The turmoil in the currency markets are the first signs that Central Banks are going to loose control of the interest rate markets. 

World is Now at the Mercy of the Federal Reserve

The above headline is the title of an article that appeared in Business Insider. The article is based on a report that was published by the Bank for International Settlements in January called “Global dollar credit: links to US monetary policy and leverage”

It tells the story of the massive amount of global Dollar debt in the world and the effects the Federal Reserve’s zero interest rate policies has had on the world. According to the article, foreigners have borrowed 9 trillion in US currency outside of the American jurisdiction. (Source: Business Insider 2015 march 12th)

The Dollar index has surged 24% since July and 41% since mid 2011. This makes debt priced in US Dollars much more expensive to service. The article references the problems emerging market currencies have when they have to pay off Dollar denominated debt. 

The article does a good job of explaining what is really happening beneath the surface of the global economy. It highlights why the next shock will likely come in the currency and interest rate markets.

Here is the link for those of you who want to read the full article

Business Insider Article

Author: celticgold.eu

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