Draghi's Plan Has Pleased the Markets, But the Same Old Concerns Remain


There seems to be some good news from Europe. Markets have reacted well to European Central Bank president Mario Draghi's speech yesterday and the euro is at a two month high. Draghi's speech yesterday introduced a new bond buying mechanism that aims to lower the borrowing costs for countries like Spain and Greece.

Austrian school economist Detlev Schlichter has outlined why the optimism could be short lived:

The markets' initial response is somewhat silly, in my opinion, albeit not entirely surprising. Equities are rallying hard, in particular bank stocks. So does government debt. The euro is stronger versus other paper currencies because the risk of breakup has allegedly receded. But breakup looked unlikely even before.

In fact, no response was needed. Nothing material has changed. Like the central banks in Britain and the US, the ECB will now actively and directly support government debt with the printing press but this was sooner or later inevitable anyway.

Schlichter also highlights how removed central banks and governments are from the economic laws that govern most people's lives:

It is a matter of logic that anybody who habitually spends more than he earns and borrows the difference puts himself at the mercy of his creditors. When those lose faith in him, he will be unable to roll over his debt or borrow more, or may only be able to do so at punitively high rates. That is the flipside of living constantly beyond your means, of going ever more into debt. You need somebody to fund such extravagance. When your lenders lose trust in your ability to repay, it is 'game over'.

But in our system of unlimited fiat money this does no longer apply to banks and governments. For these two entities it doesn't matter what the investors and depositors  – 'the market' – think or feel. In these cases, the central bank bureaucracy assumes the role of ultimate decision-maker.

As well as the economic worries, there is also a political reality to consider. The new mechanism requires that the countries that want their borrowing costs lowered implement austerity measures. Austerity measures might be hard to sell to citizens of the most affected countries. Graeme Leach, Chief Economist at the London-based Institute of Directors, summarized this concern succinctly:

The ECB's decision to enter secondary bond markets could be the game changer the IoD has long argued for. But there's a hitch. ECB action is conditional and depends on countries such as Spain signing up for even more austerity. The key question is whether more austerity is politically possible with 25pc headline and 50pc youth unemployment.

For all of the initial optimism it still looks like a euro crisis is as far away as ever from a comprehensive solution.

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  1. These EU announcements, followed by celebrations and stock rallies, followed by additional bad news, are getting boring. I don’t see any real solution to their rather severe problems here, because if those countries were going to voluntarily go austere, they’d have done so by now.

    1. Funny that so many of the other European nations wised up – “uh, no, I don’t think we’ll want to join.” Bulgaria can figure out that this is a disaster waiting to happen, but apparently it’s either too much for the dipshit business pundits/bankers/brokers, or they just want to enjoy the toboggan ride to the bottom.

      1. I’m hoping that Europe does figure this all out and actually takes steps to limit government spending and socialism-a-rama.

        That would serve as a good example to us and would help us because they’re a critical trading partner. That and it would prevent all kinds of trouble for the Europeans themselves.

        1. That and it would prevent all kinds of trouble for the Europeans themselves.

          Cause when the EU causes trouble for themselves, it tends to turn into world wars that drag the rest of the world into the gutter with them…

          1. Geez, a couple of Weltkreigen and everyone gets all upset!

            1. Ja, ich weiss!

          2. I was thinking just for the Europeans’ sake, but yes, that’s an excellent point. Two world wars were enough for us, thank you very much.

    2. Eventually, austerity will be forced on them.

      1. “They were not…unresponsive…to the forced austerity…”

    3. Is it true that once you go Austere, you never go back?

      1. Hitler was an Austerian. That’s why Europeans resist Austerity so much.

  2. The name Draghi is very fitting for that picture. Lucertola might be even more fitting, but it’s pretty close.

  3. There seems to be some good news from Europe.

    But – lemme guess – they’re still doomed, right?

    In fact…nothing material has changed.

    Thought so.

  4. a new bond buying mechanism that aims to lower the borrowing costs for countries like Spain and Greece

    So essplain this to me, financial types. If an entity is in trouble because it’s too deeply in debt, does making borrowing easier fix the problem?

    Is this some hair-of-the-dog remedy that’s just too complicated for me to understand?

    1. Is this some hair-of-the-dog remedy that’s just too complicated for me to understand?

      Well, now they’re messing with a son-of-a-bitch, if that helps.

      1. They shouldn’t go doin’ that.

  5. In fact…nothing material has changed.

    Well, gold is up $43 today.

    1. No, no – nothing TANGIBLE has changed. That gold isn’t worth the paper it’s prin….wait a minute….

    2. The anthropomorphism of “pleased markets” annoys me.

      Market price indices jumped, as did the gold price (up about 2%) and silver (up about 3%), because traders are anticipating looser money, and more debasement.

      What is pleasing or unpleasing about any of this?

      1. “”What is pleasing or unpleasing about any of this?””

        uhm… day trading gold is a fun passtime?

        1. For risk lovers and adrenaline junkies, maybe. But, yeah, ok.

      2. The automatic assumption is higher prices = good.

  6. “And the idiots couldn’t see that by doing all this frivolous spending, they were mocking the economy! And they made the economy very angry. We’re all feeling the economy’s vengeance because of materialistic heathens who did stupid things with their money.”

    1. An angry economy is a “market failure”.

  7. Who cares? Bill Simmons is back to writing about football! Fuck the NBA, fuck that Red-Sox-Homer excrement he spills during the offseason, SIMMONS IS BACK TO WRITING ABOUT THE ONLY THING HE SHOULD EVER BE PAID TO WRITE ABOUT! It’s a good day. And, whoever’s running Black Leather Jacket in the You Didn’t Build That league, Vick is not going to last a quarter and Luck is going to hang 35 on the Bears! That’s right, you’re going down even though I hobbled my team with David Wilson!

    1. Luck is going to hang 35 on the Bears

      Assuming Julius Peppers doesn’t flat out kill him…throwing the ball to whom?

      1. You don’t think Fleener is good for 5 TD’s? He’s the new Gronk!

    2. Having that single game on Wednesday was good for my team’s self-esteem. Let’s see if it lasts on Sunday.

    3. I like his NBA writing. I think he is a very good NBA writer. He sets the NBA on its ear and genuinely knows and cares about the game.

      When he writes about the NFL, he just turns into a noxious Patriots homer just like he is a noxious Sox homer when he writes about baseball.

      1. He’s a great basketball writer, a decent but entertaining NFL writer, a slightly better than hack baseball writer (he was sub-hack until he realized sabermetrics could help him win at fantasy), and an irredeemably ignorant hockey writer. One of the primary reasons I root against the Bruins is so Simmons doesn’t waste one of his 40 yearly columns bitching about the Bruins and infuriating anybody that has actually follows the sport for more than one game per year. OTOH, I think he could have gotten a steady gig as an NBA pundit even if he didn’t have his Gen X / Millenial slacker niche.

        On a side note, I really wish that nobody came up with the podcast. Their only purpose is to enable sportswriters’ laziness. 5 years ago I had at least 3 times as much shit to read on the internet. Simmons is probably the worst offender here, but it’s a plague that has proliferated throughout that industry.

  8. This is teh awesome =

    Prisoners Fear Freedom in Crisis-Hit Europe…..25z;_ylv=3

    The story is really about the sad of convicts facing terrible unemployment prospects…which is geniune suck at any time….

    …but the undertone is more like, “Those Enslaved by State Upset They Can’t Stay in Prison”. Or rather, its another NYT-style sob story about how the economic crisis ‘hurts the most disadvantaged’, and isn’t it sad the State cannot provide for all?

    re: Draghi – I don’t think anyone in ‘the market’ is fooled into thinking the various forms of debt-recycling in the EU is anything but optics…but tradable optics nevertheless.

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