The ECB’s QE is fraudulent credit – really dangerous, toxic stuff.

By David Stockman, David Stockman’s Contra Corner

Well, he finally launched “whatever it takes” and that marks an inflection point. Mario Draghi has just proved that the servile apparatchiks who run the world’s major central banks will stop at nothing to appease the truculent gamblers they have unleashed in the casino. And that means there will eventually be a monumental crash landing because the bubble beneficiaries are now commanding the bubble makers.

There is not one rational reason why the ECB should be purchasing $1.24 trillion of existing sovereign bonds and other debt securities during the next 18 months. Forget all the ritual incantation emanating from the central bankers about fighting deflation and stimulating growth. The ECB has launched into a massive bond buying campaign for the sole purpose of redeeming Mario Draghi’s utterly foolish promise to make speculators stupendously rich by the simple act of buying now (and on huge repo leverage, too) what he guaranteed the ECB would be buying latter.

So today’s program amounts to a giant bailout in the form of a big fat central bank “bid” designed to prop up prices in the immense parking lot of French, Italian, Spanish, Portuguese etc. debt that has been accumulated by hedge funds, prop traders and other rank speculators since mid-2012. Never before have so few – perhaps several thousand banks and funds – been pleasured with so many hundreds of billions of ill-gotten gain. Robin Hood is spinning madly in his grave.

The claim that euro zone economies are sputtering owing to “low-flation” is just plain ridiculous. For the first time in decades, consumers have been blessed with approximate price stability on a year/year basis, and this fortunate outbreak of honest money is mainly due to the global collapse of oil prices—not some insidious domestic disease called “deflation”. Besides, there is not an iota of proof that real production and wealth increases faster at a 2% CPI inflation rate compared to 1% or 0%.

Nevertheless, Draghi had no problem gumming the following absolute gibberish in announcing that his big monetary bazooka would be soon firing at will on the hapless citizens of the E-19.

Today’s monetary policy decision on additional asset purchases was taken…..(because) the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation.

This assertion is blatantly contradicted by the facts. Outside of the commodities and industrial materials complex, where prices are being weakened by the rapid cooling of China’s construction madness, it is still “creeping inflation as usual” in the EU-19 economies. There is flat out no emergency that could possibly justify an ECB action which will result in the creation out of thin air of what amounts to fraudulent credit equal to nearly 10% of euro zone GDP in less than two years.

And folks, it is fraudulent credit – really dangerous, toxic stuff. The $1.2 trillion of debt securities to be purchased by the ECB (and its constituent national central banks) in the secondary market originally financed that amount of labor, material and capital consumption. Can you actually pay such massive sums to vendors of real goods and services with central bank manufactured digital credits and still pretend that the economy is functioning on the level? If so, why not manufacture $5 trillion or even $15 trillion of ECB credit and buy up the entire euro bond market?

In short, Draghi is presiding over a gargantuan fraud and can’t be so stupid as not to recognize it.  Indeed, the dictionary definition of a “charlatan” could not more aptly describe his current gambit: “….a person falsely claiming to have a special knowledge or skill; a fraud.”

A few weeks ago, I called out the lame case on which Draghi’s “low-flation” humbuggery is based. Nothing has changed since then. So it is self-evident that the ECB’s new bond buying binge is designed to relieve financial speculators of hot merchandize, not long suffering euro zone citizens of the stone cold economies that their overlords in Brussels and the national capitals have confected (Wolf: this article is linked below).

It goes without saying, of course, that the evidence for Draghi’s QE that you can’t find in the inflation curves is screamingly apparent in the bond price curves. They have gone damn near parabolic in the 30 months since Draghi’s “whatever it takes” ukase. The windfall profits which have accrued to riders on the Draghi curve are flat out obscene.

This morning all euro zone sovereign debt is trading at absurdly low yields. Even as Draghi foams at the mouth about the ECB’s determination to get inflation back close to its arbitrary 2% target, the Italian 10-year bond is trading at 1.56%, the Spanish 10-year at 1.42% and the French bond at the nearly insane level of 0.70%.  Or as one wag recently noted, European debt yields has not traded this low since the black plague leveled the people and their sovereigns, alike.

Now self-evidently, the speculators who have ridden the Italian bond down from 7% don’t see any contradiction between Draghi’s pledge of 2% inflation come hell or high water and today’s nominal yield of 1.56%. They don’t care, they don’t discount, and they most certainly do not engage in “price discovery”. Instead, they hover with their finger on the “sell” button ready to unload at any moment their vastly over-priced stash on the stupid apparatchiks who run the ECB.

Exactly, the same can be said for the Spanish and French curves below. The fast money traders, of course, do not recognize that Spain’s public debt ratios continue to soar despite the phony “austerity” claimed by the crooks who run its government, and the insurgent anti-austerity political party and Catalonian succession movement that are likely to make it ungovernable in the near future. They just don’t care because there is a patsy in Frankfort ready to relieve their downside risk.

But the most absurd case of price discovery destruction fostered by Draghi’s foolish promise, and now action, is the French 10-year bond yield. French socialism and dirigisme have finally strangled its private economy and sent capital and its best enterprenurial talent scrambling for foreign shores, thereby leaving its bloated public sector – now at 57% of GDP – high and dry.

Yes, the above juxtaposition makes all the sense in the world. It is entirely reasonable that a state drifting toward insolvency and/or ruinous taxation should be able to borrow 10-year money at 0.70%. That is, when the fix is in, the central bank printing press is open to buy, the apparatchiks are terrified and one of history’s greatest monetary charlatans is in charge – the speculators have nothing to do but harvest their haul.

So now begins the greatest heist since Bernanke bailed out Wall Street in September 2008. By David Stockman, author of The Great Deformation: The Corruption of Capitalism in America. This article originally appeared on David Stockman’s Contra Corner.

The notion that a hairline puncture of the zero-inflation line is a precursor of a deflationary calamity amounts to economic voodoo. Read… Deflation Calamity Howlers Are Dead Wrong – in Europe and Everywhere Else

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.