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Draghi's Giant Giveaway; More Handouts for Wall Street

By       Message Mike Whitney       (Page 1 of 4 pages)     Permalink

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Reprinted from Counterpunch


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Last week, European Central Bank chief Mario Draghi announced a much bigger and wider-ranging stimulus package than anyone had expected. Unfortunately, the ECB's bond buying program will have no impact on employment, business investment, inflation, lending or growth. It will, however, create a temporary incentive for corporations to buy back more of their own shares while providing more cheap cash for banks to roll over their prodigious pile of debt which otherwise would have dragged them into default. All in all, Draghi's turbo-charged QE should do largely what it was designed to do, shift more cash into overpriced financial assets while perpetuating the illusion that the EU banking system is still solvent.

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The size and scale of Draghi's massive giveaway is impressive by any standard. He increased his purchases of financial assets by a hefty 20 billion per month (from 60 billion to 80 billion), pushed interest rates lower into negative territory (by 10 basis points), improved financing for the banks, and announced his intention to buy investment grade corporate bonds. The announcement that the ECB planned to enter the bond market was warmly received on Wall Street where giddy traders bought up everything that wasn't nailed to the ground. The Dow logged another triple-digit day while the S&P and Nasdaq followed close behind.

In theory, the ECB's buying of corporate bonds will lower funding costs for corporations which will then trickle down to working people through increased investment, more hiring, and eventually higher wages. That's the theory at least. But after seven years of similar QE-iterations, we can safely say the theory does not jibe with reality. What actually happens is that the money stays largely in the financial system where it ignites more reckless speculation that leads to even bigger asset-price bubbles.

There's an excellent article on Yahoo Finance which shows the effect that QE has had on stock prices. The article is aptly titled "The Fed caused 93% of the entire stock market's move since 2008." Click here. According to economist Brian Barnier, principal at ValueBridge Advisors, current stock prices do not reflect fundamentals nor are they the result of market forces. Equities are high because, in his words, "the Federal Reserve took to flooding the financial market with dollars by buying up bonds." Now that the Fed has turned off the liquidity spigot, stocks are circling the plughole.

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Can Draghi's latest monetary infusion reverse the trend?

Temporarily, perhaps, but long term, no way. Keep in mind, earnings have been steadily declining for more than two quarters, which is why Draghi and his fellows have swung into action. The CBs are attempting to extend the business cycle in order to shore up flagging earnings and keep stocks airborne for a little while longer.

But we're getting ahead of ourselves. Ostensibly, Draghi's plan to buy corporate bonds is an attempt to reduce financing costs for European companies.

Why? Aren't financing costs low already?

Yes they are, extremely low. But, once again, we have to refer to the theory, and the theory states that if financing costs are reduced, then corporations will expand their operations, hire more workers, and invest in the future. That, in turn, will stimulate more growth and strengthen the recovery.

The problem is, the theory is flawed. Corporations don't expand their operations or hire more workers when demand is weak. And demand IS weak mainly because central banks have worked with their government counterparts to keep it weak by slashing deficits and intensifying austerity.

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Draghi knows this just like he knows that consumption in the Eurozone is shrinking not expanding. And the reason its shrinking is because Draghi and his ilk want unemployment to remain high in order to keep inflation low. As long as inflation stays low, Draghi can continue to provide cheap money to his crooked friends on Wall Street, which is the real objective.

What this tells us is that Draghi's QE is not really "stimulus" at all, but a form of upward distribution concealed behind public relations sloganeering.

But why is Draghi targeting corporate bonds?

Well, it's another way to give the big corporations more money through stock buybacks. Here's how it works: The ECB announces it will purchase investment grade bonds which is a signal to Wall Street to increase its issuance of bonds in Europe, so they can take the proceeds, stick them in their pocket via stock buybacks, and trundle off to their vacation villas on the Amalfi Coast. Do you think I'm kidding? Check out this clip from the Wall Street Journal:

"The ECB's largess in lowering the overall cost of borrowing in Europe has led to a rush of euro-denominated bond issuance by U.S. companies. Last year, they accounted for nearly a quarter of issuance and so far this year for a third, Societe Generale SCGLY 4.33 % notes. Some of the ECB's efforts may just contribute to more debt building up on U.S. investment-grade balance sheets."
(Never Mind the Euro: Here's the New Test of ECB Success, Wall Street Journal)

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Mike is a freelance writer living in Washington state.

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