The EU is Out of Money. End of Story. And Neither the Fed Nor the ECB Can “Print” To Save the Day
July 4, 2012 Leave a comment
By Graham Summers
While various media outlets and “analysts” try to claim that the EU summit was somehow a success and that Europe’s issues are solved, the fact remains that Europe is out of money. And I mean TOTALLY out of money.
I realize this flies in the face of what 99% of analysts are claiming. But this is a proven fact. Of the various entities that could hold the EU together (the ECB, the IMF, Germany, and the two bailout funds: the EFSF and the ESM) none and I mean NONE of them actually have the capital to do it.
I am continually bombarded with emails from people saying, “well, if things get bad the Fed or ECB will just print and everything is solved.”
This is beyond wrong. It is just groupthink based on the idea that the Fed has intervened ever since the Great Crisis began in 2008 (ZeroHedge recently ran an article showing that the Fed has intervened in over two thirds of the months since the Crisis began).
However, even Fed intervention has a limit.
To whit, the Fed has now pulled back from any aggressive monetary policy for over a year. There has been no money printing. Instead, the Fed has re-arranged its portfolio to attempt to flatten the yield curve.
Why is the Fed doing this instead of simply engaging in more QE? The answer is because QE removes Treasuries from the banking system. We are facing a solvency Crisis and Treasuries are the senior most asset on US bank balance sheets.
When the Fed buys a Treasury from a US bank, it is providing liquidity (cash) to the bank to meet the bank’s short term funding needs.
However, by removing the Treasury from the bank’s balance sheet, the Fed is removing one of the banks senior most assets: the very asset against which the bank has leant or traded hundreds of billions and possibly even trillions of Dollars’ worth of loans and trades.
Put another way, the Fed, by buying Treasuries is making insolvent banks even more insolvent. It is a short-term gain (liquidity) for a long-term disaster: banks need as much collateral as they can get their hands on right now. And with Treasuries rallying (raising the value of the banks’ assets) any aggressive Fed program to take Treasuries out of the system would be a MAJOR step towards another solvency Crisis a la 2008.
The same pattern is playing out in Europe right now though on a much grander scale (its banking system is nearly four times as large as that of the US). While everyone continues to believe the ECB can save the day, the fact remains that the ECB has NOT bought a single sovereign bond in 14 weeks.