Early Wednesday morning Germany's Federal Constitutional Court ruled that plowing taxpayer money into the the ECB's latest plan to prop up the euro zone economy was not unconstitutional (double negative theirs), freeing the way for the implementation of the European Stability Mechanism to start buying sovereign bonds of member nations. In English, Europe is now free to start their own slightly muted version of quantitative easing.
Jim Rogers, the legendary investor and chairman of Rogers Holdings isn't impressed. The latest ruling and the Draghi plan (announced last week, which catalyzed a significant rally) make everyone feel a little better but does nothing to cure what really ails the world. "We're all going to pay a horrible price for this in a year or two or three," Rogers tells me in the attached video. The fact that Europe seems to be intent on performing a euro version of QE only gives the Western world "unanimity towards mutual destruction."
The upside of the U.S. having the ECB joining it in printing money to artificially suppress yields is that it take some pressure off the Federal Reserve to keep doing the same thing. In a global financial world, yields are a relative game. If the U.S. fake risk-free yields are slightly more reality-based than those in Europe, the laws of supply and demand would suggest increased organic buying of American debt as opposed to the synthetic buying created by quantitative easing. The existence of Europe's OMT plan gives the Fed a decent chance to ignore cries for QE3 without crushing the market. Such thinking forms the lynchpin of the argument being made by those who don't think the Fed acts tomorrow.
"QE1 failed, QE2 failed, so I'm not so sure they would announce QE3, because they'll look like fools again," says Rogers. Reluctance to look silly aside, the "Investment Biker" doesn't think no QE means the same thing as less Fed stimulus. The Fed has the stated goal to keep rates between zero and 1/4% through 2014. How they go about doing it is largely semantics.How and why would the Fed throw good money after bad, particularly in an election year? "Because Mr. Bernanke wants to keep his job." Sometimes the truth is both ugly and simple.
- Politics & Government
- European Stability Mechanism
- quantitative easing