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Europe Seeks to Copy U.S. Plan of Solving Debt Crisis with Quantitative Easing

Europe is looking at solving the European debt crisis by creating more debt, which has been the U.S. master plan all along.

“European Central Bank chief Mario Draghi told euro zone governments on Friday to act fast to get their rescue fund up and running, expressing exasperation at their lack of progress in response to an escalating debt crisis.” (Reuters)

The euro plan has been big on promises but short on specifics. Finally, it is looking more and more like Europe may copy the U.S. plan for “recovery” by creating money out of thin air in order to provide “quantitative easing.” Reuters goes on to report:

Draghi put the onus firmly on governments, saying they had failed to put into practice decisions underpinning the European Financial Stability Facility — the rescue fund which they have promised to give more firepower without yet explaining how.

“Where is the implementation of these long-standing decisions?” Draghi said at a banking conference in Frankfurt. “We should not be waiting any longer.”

Many analysts believe the only way to stem the contagion in a crisis that began with Greece but now risks engulfing Italy, Spain and even France is for the ECB to buy up large quantities of bonds, effectively the sort of ‘quantitative easing’ undertaken by the U.S. and British central banks.

In other words, the only way to keep bond rates down, as the U.S. found when China stopped buying, is for the E.U. to buy the bonds in order to make up for the lack of demand. If you want to sell you bonds for lower interest, you have to increase the demand for them.

U.S Federal Reserve now owns more U.S. debt than China

The pressure for the ECB to enter the realm of quantitative easing and play the role the Fed plays in the U.S. happens right as news comes out that the Fed now owns more U.S. debt for the first time in history than China. How does that work — the U.S. finances its own debt? Isn’t that a lot like using your left pocket to give your right pocket a loan? The Fed does this by creating money out of nothing. It’s hard to imagine how that is ever going to settle into sound monetary policy. When Mexico and Zimbabwe and other countries have done such things, U.S. financial experts scoffed at the foolishness of creating money out of thin air. Now it is the primary U.S. monetary policy. IN FACT, it is considered exemplary U.S. policy because Britain has already followed it, and now Europe is seriously considering it, too. The sage advice of gurus Timothy Geithner and Ben Bernanke has convinced the world.

Early this year, in my Letters to Stan, I argued when no one else was saying it, that gold was escalating so rapidly  in value because China was buying precious metals and that we’d soon find they were divesting in dollars. Months later it was revealed in the news that China’s assets in precious metals had greatly increased during the first quarter of the year and that its assets in U.S. bonds have diminished slightly. China, in other words, is now investing its surplus elsewhere. In one year, the Fed’s ownership of U.S. treasuries has doubled from $800 Billion to $1.6 Trillion. During that same time, Chinese investment in U.S treasuries has dropped slightly to $1.1 Trillion.

That alone explains why the Fed has HAD to start buying U.S. bonds. The United State’s major financier, China, no longer wants them. The U.S. is buying its own debt to avoid raising interest to the level that would be necessary to attract enough buyers to replace China. Now that the Greek Crisis has sent European bonds spiraling higher, Europe is looking seriously at this same charade to bring down the interest rates that nations have to pay to finance their debt.

How this game works in the U.S. is that the goverment gives loans from its left pocket to its right: the U.S. Treasury pocket issues bonds to create money. The Fed pocket buys the bonds with no actual money to buy them. It does so essentially with I.O.U.s. Ta da, money is created out of thin air! It is not even borrowed from anyone who has money to loan.

How sustainable is that path? Yet, that is the path Europe is now looking at, too. The U.S., it seems, has talked half the world into its own crash course of finance.

 

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