ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency

The only other option: “Orderly restructuring.”

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.

But now there’s a snag.

Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to €60 billion a month. And it plans to further withdraw from the super-expansionary monetary policy. To do this, according to Der Spiegel, it wants to spread more optimistic messages about the economic situation and gradually reduce borrowing.

Frantically sowing the seeds of optimism on Wednesday was Bruegel’s Francesco Papadia, formerly director general for market operations at the ECB. “On the economic front, things are moving in the right direction,” he told Bloomberg. The ECB will begin sending clear messages in the Fall that it will soon begin tapering QE, Papadia forecast. By the halfway point of 2018 the ECB would have completed tapering and it would then use the second half of the year to move away from negative interest rates.

So far, most current ECB members have shown scant enthusiasm for withdrawing the punch bowl. The reason most frequently cited for not tapering more just yet is their lingering concern about the long-term sustainability of the Eurozone’s recent economic turnaround.

The ECB’s binge-buying of sovereign and corporate bonds has spawned a mass culture of financial dependence across Europe, while merely serving to paper over the cracks that began forming — or at least became visible — in some Eurozone economies during the sovereign debt crisis. In many places the cracks are even bigger than they were back then. This is the elephant in the ECB’s room, and by now it’s too big to ignore.

In one country alone, the cracks are so large that they could end up fracturing the entire single currency project. That country is Italy.

Astellon Capital’s report on Italy’s dependence on ECB bond purchases poses the question: If the ECB tapers its purchase of Italian bonds further, who would pick up the slack?

The Italian banks, which are themselves deep in crisis mode and whose balance sheets are already filled to the gills with Italian bonds? Hardly. When QE ends, the banks are more likely to become net sellers, rather than net buyers, of Italian debt. The only way for the game to continue is if over the next six years non-banks increase their purchase activity up to seven times that of the past nine years.

In other words, the very same investors who have used QE as the perfect opportunity to offload the immense risk of holding Italian liabilities onto the Bank of Italy’s, and then onto the Eurosystem’s, would need to step back into the market in a massive way, just at a time that the country in question is on the verge of a full-blown banking crisis.

That is not going to happen. As such, when the only large purchaser of Italian debt, the ECB, gradually leaves the market, the inevitable result is going to be soaring yields. Italy’s debt overhang and the cost of servicing it are guaranteed to grow.

Rome is well-accustomed to shelling out vast sums of money on servicing the interest on its gargantuan debt, now at 135% of GDP. Since 1995, the country has spent the equivalent of 5.5% of annual GDP on servicing its interest costs. That’s one of the highest rates in Europe, over double that of Spain and just one percentage point lower than Greece’s.

At the height of the sovereign debt crisis, in 2012, Italy’s government lavished €84 billion on interest costs alone. By 2015 that sum had shrunk to €69 billion, its lowest point in seven years, as a direct consequence of the ECB’s QE program which pushed down Italian yields. When the effects of that program are withdrawn, it won’t be long before Italy’s government begins suffering the pangs of withdrawal symptoms.

According to Astellon Capital, the only long-term solution to this problem is to carry out an orderly restructuring of Italian debt. In fact, by this stage in proceedings, the stark choice is between an orderly or disorderly restructuring of Italy’s debt.

A disorderly restructuring would significantly increase the likelihood of an Italian exit from the Eurozone. In his interview with Bloomberg, Papadia was nonchalantly dismissive of such an eventuality. “When Italy will be confronted with the consequences (of Italexit), something will be done to avoid it,” he said. “And maybe that will be the Troika coming to Italy.” All said, of course, with a beaming smile. By Don Quijones.

Because Italy’s banking crisis and other problems have not been solved. Read…  In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”

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  63 comments for “ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency

  1. mvojy says:

    The Eurozone was a good idea on paper…. toilet paper that is

  2. Flying Monkey says:

    They will never learn.. The same thing happened in Greece. Somebody steps into save them and all the rats sell to the Central Banks or the saving authorities.

    The rats get out of their positions at full price with capital gains and then the authorities become the only buyers and get stuck with the crap.

    The EU is the perfect mechanism for bailing out the private companies.

  3. Quite Likely says:

    It’s nuts that we have these problems that could be solved with a keystroke. Is the ECB legally allowed to forgive a lot of the debt it owns? Imagine if tomorrow they just told Italy (and the other countries whose debt they own a lot of) “don’t even worry about it guys, it’s gone” and just wrote that debt off the book. What bad consequence could they be worried about?

    • Wolf Richter says:

      You asked: “What bad consequence could they be worried about?”

      Here’s just a flavor: The destruction of the currency, a la Venezuela. And the destruction of the economy as a result, a la Venezuela. So no big deal.

      This would also be illegal under the EU treatise (though that hasn’t always stopped things before, including QE).

      The alternative process is to “restructure” the debt officially (this is what happens in a bankruptcy proceeding for individuals and companies), with big haircuts for creditors. Greece did that with its debt held by private sector investors in 2012. Haircuts on debt held by the ECB means that the national central banks get hit, which means taxpayers of the Eurozone countries get hit because they capitalized the ECB via their central banks.

      So it gets complicated in a hurry.

      If it were up to the Italian government, that’s the first thing that would have happen, however, and long ago. In fact, when Italy still had the lira, devaluation against the DM was the rule. This devalued Italy’s lira debt. Also check out the chart of the Greek drachma against the mark or the dollar. Both Italy and Greece have excelled at destroying their own currencies. This has posed a slew of problems, including very high borrowing costs and constant capital flight.

      That’s why Greeks voted against leaving the euro in 2015. They remember what it was like to live with a currency that its government used as a method to steal from them.

      We complain about the destruction of the dollar, but that pales against what happens with other currencies.

      • Hiho says:

        Wolf, do you really believe that? The euro will be destroyed if the debts are left in place, so it is just the other way around

        Italy used to devaluate its currency, so what? If that happens again maybe the wealthy in italy will have to pay more to send their kids to elitist universities abroad or to go ro disneyland but at least it would recover its industrial sector.

        The vast majority of the population have nothing to lose. And mind you, italy has survived for lots of years without the euro.

        Your talk about Venezuela is so disappointing. It’s just like the righr wingers in spain shouting “venezuela!!!” Each time the cleptocracy is in danger.

        We are used to this bullshit so it is not even worth trying. Venezuela is venezuela, italy is italy.

        • Wolf Richter says:

          The euro won’t be destroyed, not anymore than the dollar, under current management. But the Eurozone might see some countries go their own way. These two things are very separate and should not be conflated.

          If a few countries of the southern periphery leave the euro and get their own currencies, it could very well push up the value of the euro…. because it would take the weaker links out of the currency union. Now, if Germany leaves the euro, all bets are off.

        • nick kelly says:

          True Italy survived and Greece survived. But once they got the EU credit card, they wanted to do a lot more than survive.

          Younger Italians who see films of Italy post- war are amazed how poor most of the people were.
          Greece is simply not a first world country- but it spent the first years of euro membership pretending it was.

          Is the mention of Venezuela some kind of cherry picking?
          How about their next door neighbor, Argentina, that has seen several currency collapses.
          The other day I mentioned Zimbabwe as the poster child of currency collapse and sure enough someone commented that this was a unique situation and not relevant.
          Actually, out of the 150 or so countries in the UN, a minority have convertible currencies.
          But aren’t they good internally?
          Not really- people prefer a hard currency or even barter to the government scrip.
          Mobutu, the Philosopher and Supreme Guide of Mobutism, felt short of money one week so he just added a zero (or was it two) to the notes. But when he tried to pay the army with them and the Kinshasha merchants wouldn’t take them a nasty riot broke out with terrified Westerners holed up in hotels. This ended when Belgium the former colonial power dropped in 500 paratroops and the next day all was calm.

          The history of paper currency is full of disaster going back to the first big European one- introduced by John Law in France in the 18 century. His sell sheet to the French Monarch- ‘I can turn paper into gold’
          The failure of his scheme, which took over completely and towards the end banned gold and silver, is considered a cause of the French Revolution

          The history of paper currency is a great case for gold.
          Silver? Sure, but it can be debased with alloys. Greece was kicked out of the Latin Union a kind of nineteenth century precursor to the EU for doing that, along with the Vatican States.

        • DV says:

          When Fed engaged in money-printing, this at least added to GDP. ECB’s money-printing does seem to have similar, although somewhat more modest effect, on the Euro zone as a whole, but those mostly benefiting are countries with less debt.

          Anyway, although some argued that this will just allow to buy time, the money-printing was still expected to address the debt overhang. But this has not happened. In relative terms the public debt increased even in the US. So you are where you started with QE – debt levels remain stubbornly high even with much bigger CB balance sheets. Tapering is likely to put brakes on growth, meaning that in relative temrs the debt will most likely jump.

      • Hiho says:

        And another question, is it better to be robbed by banksters charging interest for money created from thin air insteas of letting sovereign countries control their own printing press?

        Before you answer “Zimbawe” keep in mind these 2 things. First of all we are already in Zimbabwe, just take a look at the price of every single asset. On top of that, also remember that europen countries used to be far more prosperous with their own currencies. Just ask them (us) what do we prefer.

        • chip javert says:


          You’re upset at Wolf’s Venezuela comments? That economy is living proof of the answer to the question he was asked. Are you actually defending Venezuela’s current management?

          As one who has recently been in Zimbabwe, your “we are already in Zimbabwe” statement is laughable. If you’re making an analogy (o simile or metaphor or what ever the heck is is) at least pretend to be realistic.

          Otherwise, you might as well just stand around crying “It’s worse than we thought it was! No one can fix it! we’re all gonna die!).

        • Hiho says:

          I am not defending Venezuelas management. I am not well informed enough so I am careful here.

          What I am just saying is that you cannot defend the the examples of third or second world countries such as zimbawe. Italy used to have a really strong industrial sector under the lyra and was not the verge of becoming zimbawe. Similarly Spain used to do much better before we had access to this inmense cheap credit that came with the euro.which by the way, did not improve our lives, it just fueled bubble after bubble.

          Oh gosh! Do not be naive, one of the objectives of the euro was precisly to deinustrialize the southern countries and to subsidize german exports.

          Be that as it may, stop using zimbawe to prevent us from wanting to recover our monetary system. Every single european country has had its own currency before and we used to do much much better.

          Finally, banks also create money out of nothing and for this reason we are now in zimbawe when it comes to real state prices (yeah there were bubbles even before qe). Why this is ok? Why on the earth do you asume that only govermment fresh money can cause inflation?

          I asume that neither you or wolf have vested interests to omit these facts. You just believed what the teacher of econ 101 and the wall street journal told ya, i guess. Fakeconomics.

        • George McDuffee says:

          Indeed! In the US at least, most (90 to 95%) of what passes for money is not money at all but bank credit created from nothing. Why are these private “for profit” corporations allowed to create “money?” Why are these private “for profit” corporations allowed to control the level of economic activity in the U. S. and largely direct the U.S. economy by which sectors and activities they invest their “ersatz” money?

      • John k says:

        Destruction of currency means inflation? But the ECB purchase of the debt has already occurred, just as earlier Italy spent the money that they borrowed. So the inflation caused by that spending is also in the past, and many think inflation has been too low, not too high.
        Italy’s flat economy would have expanded if she had borrowed and spent more, and that expansion would have both created jobs and increases tax revenue.

        Anyway, writing off past debt is not inflationary.

        Regarding Venezuela and Zimbabwe… corruption, elite capital flight and farm mismanagement results in massive shortages, not least food, leading to food inflation. Money printing by regime to allow critical sectors e,g. Military to buy food etc is a result of shortages, which gets out of hand if the shortage is not fixed.
        The Weimar Republic was a bit different, war aftermath shortage of everything, gov tried to purchase gold on foreign markets with local currency to pay French enforced war reparations. Hopeless. The needed Marshall plan had to wait for another war.

        Inflation always and ever is a result of the supply and demand of real goods.

        Writing off the debt is the obvious solution, but brings the fear that it will encourage more deficit spending (demand), which of course is desperately needed throughout south Europe.

        • Wolf Richter says:

          See my comment on asset price inflation and what that does. As I said, we have asset price inflation out the wazoo, with consequences.

        • Realist says:

          Weimar managed to inflate away all the domestc debt the state had. Warreparagions was another thing because that was not denominated in marks. The lucky ones in Weimar were those who had cached imperial coins …

        • d says:

          “Weimar managed to inflate away all the domestc debt the state had”

          That happened in Weimar.

          It was not a deliberate intention.

          Simply a side effect of the Versailles Diktat. Which was deliberately constructed by france with the the intention, to bankrupt and break Germany, so that it could Neve rise again.

          In the Diktat, as In 1870, and 1914-1918 conflict (1870 round II). france failed to defeat Germany.

          Setting the stage for 1939- 1945 (1870 round III) where france would fail and have to be rescued by England and America. Again.

      • cdr says:

        Agree with everything, yet still, I will never underestimate the propensity and ability of the Eurozone to kick the can. All it would take is a good story and the acting ability of the participants to do it with a straight face. The news media would go along. Then, as long as a buck could be made in the carnage, so would the financial community.

        First, they will come up another kick the can scheme or two or three. Then they’ll write some off and tell some fantastic whoppers. Will people go along …. well, they go along now with whatever Draghi spins today.

      • alexaisback says:

        ” In other words, the very same investors who have used QE as the perfect opportunity to offload the immense risk of holding Italian liabilities onto the Bank of Italy’s, and then onto the Eurosystem’s, ”

        Do not be fooled by any of it.

        The goal is simple, bail out the banks and the ” special ” investors
        and let the taxpayers pay.

        It is the same in the US. Billions a year given the banks
        as they borrow for free and park their money with the Fed and get paid.

        It was the same in Greece, where the banks were paid. They took high risk and when they lost, the got paid anyway.

        Iceland was the only Country to say no, all the rest were bought out and paid off.

        • d says:

          Iceland could, and did say no as:

          1 The vast majority of the losers were offshore.

          2 Iceland was not in the Euro. So could do that, with out upsetting a directly interconnected common currency market. Or the ECB

          3 Unlike greece. In Iceland there was not fraudulent accounting and hiding, of national debt.

          4 With out further massive State borrowing, Iceland could not afford to bail out those bank’s anyway. If they had of borrowed the money to do it, their currency would have become completely worthless.

          5 Iceland was, and is not, an SDR currency. (Interesting to see if china plays by those SDR rules, when it happens there)

          Iceland also instituted Draconian currency controls, and Draconian taxes on foreign money, removed from Banks and the country.

          Something which was far from correct. As Iceland had allowed its banks to attract that money, with high interest rates. Then taken a lot of taxes from those interest payments.

    • Kent says:

      “What bad consequence could they be worried about?”

      Are you kidding? What if the population came to generally understand that debt is something that can just be written off?

      The inviolability of debt is a core myth within the western capitalist world.

      • TJ Martin says:

        ” The inviolability of debt is a core myth within the western capitalist world ”

        I’m in complete agreement … but try telling that to an MMT advocate .. or worse .. the current crop of MBA graduates that have risen to their level of incompetency

        • Wolf Richter says:

          Your retirement is assured by this “inviolability.” Without it, you’ll have nothing… and lots of chaos instead. Debt is the biggest asset on investors books. If it collapses, you have something far worse than the financial crisis of yore.

          You can take it down in increments through haircuts or bankruptcy proceedings, at a great expense to the creditors, and that’s what needs to happen. But wholesale debt forgiveness is total nonsense, and when its connected with central-bank money printing to make creditors whole, it smacks of propaganda.

        • John k says:

          Sovereign Gov is different from a household. We depend on debts being paid back that we owe to each other.
          But gov does not need to be paid back, just as it does not need to tax in order to spend… and just as gov must spend before the populace can earn currency with which to pay tax.
          Only ECB in EU acts as sovereign gov, does not need to be paid back, can forgive the debtors in a jubilee…
          Remember the spending that generated the debt already created inflation (or avoided deflation), forgiving that debt is not inflationary. All 4T of it.

        • Wolf Richter says:

          So those folks who own $20 trillion in US Treasuries, including the Social Security trust fund, and pension funds around the country, the bond fund holders, etc. don’t need to be paid back their money when the bonds mature? Are you kidding?

          Of course the government has to sell more bonds to pay off existing bonds when they mature, but Treasury holders are always paid back. If they aren’t, our entire system will collapse on top of itself – and on top of you too.

          Of course, instead of issuing debt, the government could just issue currency. This is not the same thing. So don’t even start down that silly road. Watering down the currency has huge impacts and EVERYONE pays, from poor laborers to the rich. No business or individual will be able to borrow money in that currency. Forget buying a house with a mortgage or with currency… And the entire economy suffers – or collapses. And so that would be good?

          I’m just scratching my head at all these crazy religions being proffered here as economic facts.

          Oh, and check out the HUGE amount of asset price inflation we’ve already had… to the point where the Fed is publicly fretting about it.

        • chip javert says:

          John K

          Venezuela is trying a version of this right now: inflating away the currency or forgiving debt – bottom line is somebody (other than the government) loses.

          Two rhetorical questions for you:

          1) Have you noticed Maduro is the only chubby Venezuelan?

          2) Do you think there might be a slight correlation between the average Venezuelan losing 19 pounds in the last year, the country having no money, and the inability to buy food?

        • Hiho says:

          Wolf you are wrong again.

          Civilization would not collapse if debts were written down. However, if they remain in place, our society tends to polarize. That is the road to peonage and neofeudalism.

          Some authors say that Rome collapsed because of this polarization, which makes sense if you take into account that serfdom is the final stage of debt bondage.

          Early civilizations used to have debt jubilees, so as to restore equilibrium and allow economic growth.

          Just asking out of curiosity, are you bondholder or something?

          Debts not always have to be paid, otherwise, why do creditors charge interest? If risk was zero because debts had to be paid no matter what, it would not be fair to charge interests. Would it?

          Do you think that paying of you debts no matter what is fair? Would you destroy entire countries such as Greece just for the sake of debts being repaid? Is that fair? Where would be germany today if the allies (including Greece) had not forgiven its debts in 1953?

          Debt is not sacred, and as Michael Hudson says, debts that cannot be paid won’t be paid. The question is when are we going to realize that and burn this dystopian nightmare called the eurozone.

        • TJ Martin says:

          Wolf .. perhaps I’m misinterpreting the thread line but why exactly did you make your ” Your retirement is assured .. ” comment directed to me ?

          Was that intended for Kent ?

          In case there’s any confusion on your part I most definitely am NOT an MMT fan nor an advocate for total debt forgiveness .

          Like you I’m all for debt reduction as well as limiting/capping future debt .

      • chip javert says:


        Please loan me all the money you have and/or can borrow. I will agree to absolutely any interest rate you want.

        I just won’t pay a cent of the capital or interest back to you (e.g.: you’ll have to “write it off”).

        This little exercise will quickly and painfully teach you the difference between myth from reality. However old you are, I’m amazed it’s taken you this long to stumble across this fundamental fact of life.

        • Hiho says:

          If you know beforehand thar kent cannot pay, then it is your problem.

          Losing money with crappy loans is great to prevent creditors from issuing them.

          So in a healtht economy debt is not sacred. Do you know what happens when creditors can issue loans without having to worry about debtors defaulting?

          Financial crash.

          Thank you very much for the example you gave. It has been really enlightening

        • Hiho says:

          I have just seen that in your example kent was the creditor, sorry. Well, whatever, just reverse the roles.

  4. Maximus Minimus says:

    Reducing purchases from 60B to zero would be a shock when in 2018 Draghi is kicked out of ECB, and replaced by a German. Even a stupid would know that a better idea is to taper gradually. Another thing that needs reducing is the term of the ECB president since the position has no oversight, either. But in EU that will probably require a revolution.

  5. George McDuffee says:

    As a [attributed] Persian aphorism has it “If you are being fattened by someone, expect to be slaughtered by them shortly.”

    This is not to say that the ECB, or indeed any of the central banks including the Federal Reserve, are filled with evil or stupid people. On the contrary, they seem to be highly educated/trained individuals, with good intentions.

    The problem is that their organizational “reality” and interests have continually diverged from those of the large majority, and now have little relevance to the actual and rapidly changing socioeconoimic conditions, with the result they and their ideologically driven institutions continue to apply archaic and barbaric economic “treatments” equivalent to Laudanum, blood letting and purges, to sick economies.

    • Dan Romig says:

      George, I question whether the Fed has individuals with “good intentions”.

      Twelve central banks comprise the Fed. The stockholders of the regional banks are privately owned banks. About 38% of the nation’s 8,000 plus banks are members of the system, and thus own the Fed banks (

      When the Fed was about to be created under President Wilson, Senator Nelson Aldrich assembled Mister Warburg, House, Morgan, Vanderbilt, Schiff and Rockefeller to Jekyll Island in November 1910 to outline the way to control the United States’ issuance of currency, and that’s the legacy we live under to this day.

      “Good intentions” does not go with the actions of these men, nor does it go with the actions of serial-felony committing JPMorgan Chase or Wells Fargo today, and these are the owners of the Fed.

      Janet Yellen may speak out the talking points of TPTB, and try to convince the public that the Fed is working to keep our economy healthy, but in reality, the Fed is working to gut the middle-class and enrich the Uber-elite. Citigroup got TRILLIONS of dollars of secret interest free loans between 2007 and 2009.

      • George McDuffee says:

        RE: I question whether the Fed has individuals with “good intentions”

        Their intentions are probably “good,” but they do not seem to understand the current socioeconomic culture [indeed no one does] and IMNSHO their priorities are wrong, for example bailing the banks and 1% rather than the vast majority of the Citizens.

        Another serious problem is their isolation and separation fro the real world where people live pay check to pay check, and a missed or reduced pay check means they and their families do not eat, and may be thrown out on the street, not that they will have to dip into their trust funds. “Austerity” may insure bond holder payments, but it means malnutrition and homelessness for for significant numbers of citizens.

    • Michael Jones says:

      There is no question that the organizational “reality” (in quotation marks because it is an unreality) and interests of bureaucrats in government and large corporations have diverged from the common weal. Most know it though, they just don’t care. They have generally benefitted from globalization, at least in this short term.
      It will be interesting to see how this all ends, which it will in a few decades at the absolute outside, probably quite a bit sooner.
      This talk of forgiving debt or not forgiving debt is academic actually. There already is way too much debt for this entire system not to collapse. We have not had a strictly capitalist system in the western world for decades now, we have had what Richard Duncan calls “creditism”. Without constantly rising levels of debt there can be no economic growth – i.e a ponzi scheme.

      • d says:

        What we have is a system based in ever-increasing credit and Unsustainable Consumerism.

        With a, big, fat, ugly, rotting fly, in the ointment, that plays by different rules to everybody else.

  6. bandini says:

    QE is a band-aid to cover large institution from the fraud they committed or inadvertently accepted. Since fraud is still rampant, there is no stopping it, until they accept reform. Since short term gains can be take by employees, its actually what’s driving the fraudulent debt growth, until they are forced to change, by way of jail.

    • Michael Jones says:

      But no one ever goes to jail…. especially those at the top.
      Did Obama prosecute anyone? No.
      Will Trump prosecute anyone? Ha! No.
      Would Clinton have prosecuted anyone? Phht – NO!
      Would Sanders have prosecuted anyone? Maybe.

  7. chriszell says:

    I don’t see that any of this makes any difference or leads to a catastrophe. The ECB or Bank Of Japan simply ‘print’ whatever money is required and if that is enough to barely sustain a low growth economy, serious inflation never happens. I keep seeing predictions of doom that never materialize on this score – and the yen is considered a reliable currency internationally. If you disagree, please explain how this act of levitation ever ends.

    • Wolf Richter says:

      You’re talking about consumer price inflation.

      But those countries, and in the US too, there is asset price inflation out the wazoo. Which is impacting housing costs among other things, and leads to a complete distortion of the economy, where more and more money is spent on housing, with little left over for the other parts of the economy. Hence the slow-growth problems we’re seeing.

      • Maximus Minimus says:

        It was such a low-hanging fruit, and you beat me to it. I would just add the massive failure of pension schemes in the pipeline. The central bandits are already sending out faint signals that people should not count on their pensions as they planned by historical norms. Those who manage to stay on the job, deprive the younger generation of opportunities, and so they stay as baristas. But as we know, bandits can’t be bothered.

      • Chris Zell says:

        I appreciate your reply but it seems rather weak as a rebuttal. I, too had trouble accepting that this QE stuff could extend indefinitely but Japan exists! Yes, we definitely have asset inflation but that seems almost completely divorced from the consumer economy. Actually, pension funds might benefit from asset inflation.
        That leaves us with housing – are we really justified in saying that housing costs are greatly crowding out other costs? Isn’t it likely that the millennial generation will bring housing costs down by not entering the market?

        • Wolf Richter says:

          Nearly ALL asset prices are hugely inflated. in other words, the value of the currency to buy these assets has been crushed. It has done immense damage to the functioning of the economy: the wages from labor can no longer afford to buy these assets (not just housing but financial assets, etc.). So the fruits of labor have been crushed too.

          This works for a while, until it doesn’t. When it doesn’t, the mess gets very big.

          Japan is already in a huge fiscal mess fiscally, so they made a decision years ago to deal with their problem their way. It’s going to be orderly and drawn out, but it will be painful (it already is), and it will be borne by the younger generation (it already is). And they all know it too.

      • John k says:

        QE spent to mostly buy longer dated treasuries, replacing interest paying assets held by saving members of the public with non interest paying assets (cash). But these people wanted to invest, not spend, so relocated their savings in a variety of assets, including corp bonds, equities, houses, art, etc, resulting in the asset inflation you mention. But not spent on CPI goods and services, as would have happened if treasury had simply given money to the populace.

        The shortage of money for regular goods and services is not caused by QE but a lack of good jobs. Too many are broke and can’t spend. There’s simply too little money in working people’s pockets.

      • d says:

        This whole Euro Bank debt situation spins round and round in an ever decreasing circle to the bottom.

        At the bottom, lies the greek frauds, that over exposed euro baking, to greek default by choice, debt.

        At least with the Italian situation we can see. Most State Debt (there will be some hidden for sure)

        In theory the ECB tapering, should be the final call for Italy.

        How to avoid this ??

        Italian 100 year Perpetual Bonds at – 1% brought by the ECB, in exchange of the total Italian debt on its balance sheet.

        If the filthy little Mafiosi at the ECB can pull that off, he will.

        The question is, will the new government in Germany let him.

        This italian situation, will at least be kicked, to after the German election.

        If the Italian situation is not resolved, a split in the Euro (france and club med into Euro 2 or some such), or worse, must follow.

        It is simply, when.

      • cdr says:

        Wolf, I can tell from your writing that you’re an honest man. While that’s refreshing and appealing, it’s also not shared by many of the people you write about. Again, listen to those who spin stories of the need for QE and the justifications they create … all of which are praised and repeated by those who can profit from them. They become established dogma. I have little confidence in the ability of those in the Eurozone to do the right thing. They will do whatever it takes.

    • Maximus Minimus says:

      Let’s go back in history.
      In the eighties, particularly the US, experienced high inflation because of repeated oil price shocks. Then FED chair Volcker, did not get bothered that the inflation had it’s root in a single commodity, and administered touch medicine. I venture a guess, that the US economy got restructured by that, and became less dependent on energy waste.
      Compare that to Greenspan who fixed his gaze on consumer inflation, and ignored most famously the internet stock bubble. The results is what we suffer today, and will suffer for a long time to come.

    • chip javert says:


      (I cannot believe my luck today!)

      Please loan me all the money you have and/or can borrow. I will agree to absolutely any interest rate you want.

      I just won’t pay a cent of the capital or interest back to you (e.g.: you’ll have to “write it off”).

      This little exercise will quickly and painfully teach you that this behavior does, indeed, make a difference.

      • Chris Zell says:

        I apologize in advance but frankly I don’t see that any of you have thought this through as to a well reasoned result. No one has to loan a government money – they simply create just enough to avoid collapse and no more. Have usurious central bankers deceived the world for centuries?
        Is it possible that asset inflation eventually creates the ruin of the Rich Elite? Do stocks and bonds end up valued like Picasso paintings – purely arbitrary and possibly ill-liquid? Where are the “greater fools” who pay the rich for them?

  8. Vespa P200E says:

    I think EU will unravel sooner than later. The concept was good but geesh take a look at European history – talk about messy in a smaller landmass with wars galore…

    Euro will die once the people realize it was all sham to boost Germans’ wealth and political clout and subsidize the not so well to do southern countries.

    As for ECB – suspect some kind of revolt and force the member countries to assume the debt as EU unravels – LOL – end won’t be pretty…

    • Frederick says:

      They’ve been calling for that for awhile now Which will be first the EU or the US? Place your bets now people

  9. walter map says:

    It was a mistake to legalise loan sharking and debt slavery, but the loan sharks and slave owners insisted, knowing that these will enable them to rob the planet until there’s nothing left to steal. And no one will stop them.

  10. Ishkabibble says:

    “Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.”

    This is the never-ending “whatever it takes” experiment that began in earnest in ’08, and we ain’t seen nothin yet. What could be wilder than what we’ve already witnessed? Just wait a few seconds to find out. Like their post-gold-standard, fiat-money-out-of-thin-air-to-buy-real-stuff experiment, the Elite are literally making up the rules for the experiment out of the thin air between their ears as they go along. “All options are on the table”, especially the tried and true, one size fits all, “go to” option. As Scott Adams put it so well, “there are very few personal problems that cannot be solved through a suitable application of high explosives.”

    Whenever there’s some kind of intractable financial or political turmoil in Emerald City and, by mandatory extension, its vassal states, the drums for war get beaten louder and louder, amplified by the MSM’s intensifying insanity and hypocrisy. This is the POLITICAL version of “whatever it takes” to get the bewildered herd to support the US’s economically necessary wars.

    In my 66 years I have never witnessed anything more grotesque than what I’m seeing today in what is purportedly the most “exceptional” nation on planet earth and its north American and European vassal states.

    • d says:

      No he will be in, I am all right jack land, hoping he dosent get nuked or enslaved as well.

      The USA is simply the counter force to the problem.

      When it fails, the world will possibly suffer the rule of the problem. As the USA ensured England (the former guardian of the free world) remains weak.

      Hopefully I will not live to see that, as I do not function well in Authoritarian Environments.

  11. jj says:

    the ECB will print and buy QE Italian and other bonds until it cannot do so anymore, the ONLY thing holding the Eurozone together is the ECB QE, without QE Italian bond interest rates would be 6-9%, Italy would go under and no amount of Grecian “restructuring” would help as deflationary cutback deflate demand for German exports paid for by extreme credit expansion in other EU members (Germany export surplus mostly in Eu and USA)

    • d says:

      “without QE Italian bond interest rates would be 6-9%,”

      Try 16 -19% PLUS.

      I believe the only reason Italian bank’s, buy Italian state debt, is because they have to.

  12. Gershon says:

    What derivatives games are Italian banks playing to mask their underlying insolvency?

  13. Gershon says:

    Right on cue, Yellen’s flying monkeys are already backing off the rate-hike jawboning. Once again, with feeling: Yellen will never hike rates of her own volition, as bilking savers out of interest income and forcing them to play in Wall Street’s rigged casino is too lucrative a racket for the Fed and its bankster cohorts.

    • Wolf Richter says:

      He doesn’t even get to vote this year. He’s irrelevant. Just worried about his portfolio. When Dudley or Yellen or some of the others start singing this song, it’s time to believe it. But they haven’t yet.

      • Gershon says:

        Jennifer Lawrence will crawl through my bedroom window and beg to have my love child in exchange for turning over her vast fortune to me before Yellen raises interest rates in June.

        Not bloody likely, as they say in England.

        Incessant jawboning and dissembling about rate hikes and actually following through are two very different things. Fraudsters gotta defraud.

  14. nick kelly says:

    Re: asset inflation. I see a painting of a skull that looks like something you’d see a garage sale just sold at auction for 115 million, a record for an American artist.
    A peak in art prices has been a reliable predictor of a bubble’s demise.

  15. Jon says:

    Anyone who things the system is fair and play by the rules is a fool

    In America you can make big only if you know how to rig the system at the expense of others
    Sad but true

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