In the last month, we’ve had two major confessions from Central Bankers.
We’ve already detailed the first, which came from the Head of the Bank of Japan, Haruhiko Kuroda here.
The second major confession from a Central Banker came from ECB President Mario Draghi. A few days ago, Draghi gave a speech in which he said:
Very low inflation complicates the adjustment process within countries, leading to higher unemployment. It delays the rebalancing process across countries, hindering those that lost competitiveness prior to the crisis from regaining it. And if low inflation is unexpected, it raises real debt burdens making it harder for the economy to grow out of debt.
On the surface this seems like a statement of the obvious: low inflation or deflation makes your debts more difficult to pay off.
However, it is only when you take this a step further and realize that he is in fact talking about the bond bubble in Europe that you realize just why he is terrified.
Remember:
1) Europe’s entire banking system is leveraged at 26 to 1. At these levels even a 4% drop in asset values (read BONDS) renders the banks insolvent.
2) Due to their massive welfare programs, most EU countries have real debt to GDP ratios well north of 300%. Even Germany is above 200%!
3) No major bank or country has used the post-crisis period (2012 to present) or lower yields to deal with their structural debt problems.
Moreover, as Draghi has found, despite three NIRP cuts and €1 trillion in QE, unexpected low inflation continues to be a REAL problem for the EU.
This is why Dragh is so concerned with “unexpected” low inflation… because he EXPECTED inflation to explode higher due to his monetary policies and instead it’s barely flatlining!
Thus, in the last two weeks, we have had TWO major Central Bank heads confess their deepest fears… namely that they do not have the monetary tools to fix their respective financial systems’ problems.
Again, the markets have yet to fully realize this. But this is as close as you can get to a Central Banker ringing a bell at the TOP.
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