European Central Bank and its USD$1 Trillion Bailout Plan

The Bank of Japan? Check.

The Reserve Bank of Zimbabwe? Check.

The United States Federal Reserve? Check.

The Bank of England? Check.

The European Central Bank? Check.

The Reserve Bank of Australia? [Silence].

Not yet, reader. Will its time come to openly and brazenly print money?

We know it and the retail banks do it behind closed doors. But it hasn’t yet announced a multi-billion dollar plan to monetise debt obligations. Of course, so far it hasn’t had to because thanks to the “we’re different” mentality, Australians have continued to make sure private sector debt continues to rise.

For instance, according to the Reserve Bank of Australia (RBA), as of March 2010 residential loans by banks stood at $935.2 billion.

That’s compared to a paltry $634 billion when the economy last peaked in October 2007.

In other words, household debt obligations have increased by about 50% over the last two-and-a-half years. An increase which has occurred almost without stopping for breath.

Who needs a central bank bail-out when it’s easier to just convince the population into believing “Australia is different.”

But anyway, back to the European Central Bank and its EUR40 billion bailout… [murmur, murmur] HOW MUCH?!

[Hehem] Right, well, what I should have said is, the European Central Bank and its USD$1 trillion bailout plan. Or to put it another way, $1.1 trillion – more than the annual output of the Australian economy.

Where did the trillion come from? We’re sure this all started off as a EUR40 minor problem. I mean, that was the reason behind the mainstream’s argument about Greece being irrelevant.

OK, we did note over the last couple of weeks that the number had ratcheted up quietly to EUR130 billion. That’s a pretty big number by itself.

But then, whammo! At 3.15am in Frankfurt, the ECB announced to the world – but not to the Europeans because they were all asleep [Shhhh!] – that it was using its “nuclear option” of monetising the debt in order to fight the “wolfpack.”

Yep, that’s right, the free market gets the blame for problems ultimately caused by… that’s right, the politicians, bureaucrats and central bankers. Even though the free market – or ‘wolfpack’ as they call it – had nothing to do with it.

But what are the chances of the ECB’s money printing plans working any better than the money printing strategy of the Fed, the Bank of England and the Reserve Bank of Zimbabwe?

No chance, we’d say.

In fact, it rather reminds us of Mission Gainsborough

General Melchett: Field Marshall Haig has formulated a brilliant new tactical plan to ensure final victory in the field.

Captain Blackadder: Ah, would this brilliant plan involve us climbing up out of our trenches and walking very slowly towards the enemy sir?

Captain Darling: How could you possibly know that Blackadder? It’s classified information.

Captain Blackadder: It’s the same plan we used last time… And the seventeen times before that.

General Melchett: E-e-exactly! And that is what is so brilliant about it. It will catch the watchful Hun totally off-guard, doing precisely what we’ve done eighteen times before is exactly the last thing they’ll expect us to do this time…

And the Watchful Huns in the markets certainly were caught unawares. Hence the French CAC40 climbing 9% and the Spanish market surging 14%.

The market obviously wasn’t entirely convinced that the ECB would be so stupid to just print a bunch of new cash in order to pay off debts. I mean, it’s obviously the kind of crass thing the Americans would do… but not the Europeans.

And the British with their Anglo-Saxon ways are just as bawdy as the Yanks. But surely the sophisticated French, the sensible Germans, and the, erm, er, Belgians would have a more balanced plan of attack.

It appears not.

In fact, based on the numbers bandied around over the last few weeks it seems to have been more like a central bank version of Deal or No Deal rather than the thoughtful deliberation of supposedly intelligent men.

We can only think that they’ve been frantically opening briefcases with numbers inside. As the ‘Bank’ spun the numbers and offered the magic trillion, the finance ministers leapt with joy, “Voila! Nous etre rich!”

And so today the European printing presses whirr into action.

But wasn’t it nice of them to do all this in the early hours of the European morning. What dedicated public servants they are. And obviously it was so urgent, that they had to release the news before Fritz in Cologne, Francois in Lyon and Giuseppe in Milan had woken from their slumber – “Don’t wake them, they need the sleep, they’ll have to work twice as hard to pay this off! Ha, ha, ha…”

Or maybe they were more eager to rubber-stamp it before Stavros and Effi in Athens had woken up. You remember what happened last time they got mad!

It still startles us how our Keynesian friends can’t grasp how illogical it is to just print money. Look at the number again, it’s the equivalent of $1.1 trillion or greater than the entire yearly output of the Australian economy.

Think of it this way. It will take the European Central Bank about, ooh, a tenth of a second to create the billions of Euros needed.

Yet it will take 10.9 million Australians working an average of 35 hours per week for 52 weeks to produce the same output.

Got that? One-tenth of a second versus one year.

One-tenth of a second versus a combined 19.8 billion hours or 71.4 trillion seconds [Ed note: we just wanted to keep going until we notched up a trillion].

The obvious question is why bother going through all that effort if when push comes to shove the central bankers will just print the money anyway?

Naturally, the reason you have to go through all that effort is because you know there’s something illogical and not right about a bank just creating money from thin air.

You don’t need to be a Doktor der Wirtschaftswissenschaften from the Ludwig-Maximilian-Universität München to work out that even as a short-term measure printing money doesn’t actually solve the initial problem.

All it does is shift the problem. It wipes debt from one bunch of people and plops it onto another bunch.

Because guess what, instead of the Greeks having to come up with a way of repaying their debts or just defaulting, the ECB is just handing over the Euros in exchange for Greek government bonds.

In return, the ECB and European taxpayers get a bunch of crappy Greek debt that no-one else wanted. Well, they would take it on, but only at an 18% interest rate. In fact, so little did anyone want it that the ECB actually has to create the money to buy it.

The issue now is what happens to the billions that will be handed out to the Greeks, Portuguese, and anyone else that needs it? The answer is that the national governments will feed the cash out to their favoured industries and pet projects.

Some will gain by the increased money supply – those that get the new money first, but others will lose out. And because the new money is in effect unearned income, like a handout, it will be wasted and squandered in exactly the same way as any other type of handout.

Not forgetting the moral hazard of having bailed them out once, is it really likely the ECB will tell them to get stuffed if they ask for more? And what about other governments? It can only be a matter of time before they play the “where’s our free money” card.

As we’ve pointed out several times, the most honourable action would have been for the Greeks and other European tin-pot governments to just default on the debt obligations.

There would still be losers of course, we’re not claiming that there wouldn’t. But at least the losers would have been investors. Investors who should always enter into an investment with the risk that they’ll lose money.

Instead, at 3.15am Frankfurt time, the European Central Bank decided it was much more important that they and their political paymasters kept their jobs. The result being that the average German, French and Italian – and every other European – will pay via the devaluation of their savings and their wages.

All just to ensure the governments are saved, central bankers are saved, and bond investors receive back 100 cents on the Euro for their crappy Greek bond investment.

What are the odds that in a year’s time we’ll hear that Goldman Sachs or JP Morgan made a motza from buying cheap Greek debt two weeks ago and then selling it to the ECB this week?

We can see the headline now, “Evil Bankers Profited as Greece Burned.”

The free market will be blamed again, and capitalism will be accused of being out of control. Of course, what the bankers and politicians will conveniently forget is that without the money printing those profits – if they exist, and we’re sure they do – wouldn’t have happened.

The odds on that story making it to the front pages are pretty good we’ll guess.


Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

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46 Comments on "European Central Bank and its USD$1 Trillion Bailout Plan"

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Supposing the ECB does print the $1 trillion worth of money to pay out investors. Where do the investors then invest their $1 trillion? The money has to go somewhere….


There are two types of depressions

Deflating Depression: No income so cant buy food = bread lines
Inflating Depression: Income but cant afford food = bread lines

An inflating depression is caused by hyperinflation. Can we get hyperinflation now that a few trillion has been printed or are we simply replacing the money supply that was destroyed?

I swear I am missing something in all this

Kris, You really need to have a look at the data from the RBA. When you say that the housing debt has increased by 50% big deal. That is about the norm. When you plot house loans from 1977 to 2010 it appears to follow an exponential curve. Loan assests held by Aussie banks increases by phenomenal rates. I calcualted on average the home loan assets of banks in Australia increase by 16% per year. That makes the 50% increase form 2007 seem quite normal. Nothing to see here. Move along now. The bears way of looking at it would… Read more »
It’s hard to see how an additional 1 trillion euros in the system won’t ultimately cause rampant inflation. Unless there is no appetite for new debt, which is unlikely. But I really can’t see how this ‘bailout’ will fix the problem at all. From my reading of it, all it means is that the PIIGS can pay their creditors now. Assuming this bailout is a loan and not a gift (is it?), the PIIGS will have to pay it all back at some point in the future with interest. And if they can’t meet their debt obligations now, how are… Read more »

ralph u couldnt have put it more perfect

Ralph I cant see how it wont cause inflation unless it doesn’t go into the economy. But will banks want to lend in high inflation? E.g. Would you want to hand over $300k capital when you know it wont be worth much when you get it back because of inflation? I suppose you could claim higher interest rates to make up for the loss of purchasing power when your capital is returned but then who is going to borrow money at double digit rates? You wont want to leave it in cash because it will become worthless very quickly So… Read more »
When I was at Uni many years ago, I was being told of a plan called “the New World Order” (NWO). Where there would be one world currency and that there will no longer be “sovereign countries” but rather the world would be run by one world government. Fanciful stuff and anyone who remotely entertained this thought was considered a “conspiracy theory nut”. I was told that to achieve this, “they” first must create the problem, and then offer the solution. Of course by the time they are offering the solution we, the ordinary folk, will be in such desperation… Read more »

GB…add China to you list of gold buyers. You may recall China recently told it’s people to go and buy gold and lots of it. That’s a lot of people. That’s a big demand for gold. Then add to this the bottom falling out of the artificial suppression of the gold price, which is gaining momentum, and you have a gold price that will reach “spiritual levels”.

cb, you argued before that bears shouldn’t want the property market to collapse because of the damage it would do. Hyperinflation would be that collapse x 1000. Shelves in coles would be empty, you would work and race down to buy stuff before your salary couldn’t and you would do that everyday. In brazil i think it was so bad that they did this every few hours. The last hyperinflation is zimbabwe and yugoslavia – its pretty nasty. But these countries never affected the gold price but if the US and EU went hyper then i think it would. Nick… Read more »

“”Avoid loud and aggressive persons, they are vexations to the spirit.”

yeah nick so all those “real loud people ” like the bushes ,cheneys, blairs, goreys ,ricers,colons ,powells ..they not loud but have pulled down the system …
u have to watch out for the “quiet sheep in wolves cloths”