I warned a friend recently that it’s dangerous and there could be a violent reversal.
Then, in recent weeks, the ECB reverted to more QE to keep the game going. But surprisingly, there has been a chorus of people who, stating the obvious, roundly criticized the decision both on the ECB's monetary committee and in the media that the negative rates are killing the banks and the financial system. This dissent is new. But Draghi did it anyway despite the criticism on his own committee. He didn't even allow the committee to vote!
|The Important EU Countries Are Now Against QE and Negative Rates!!|
The Whole Scheme Could Fall Apart
There's a chorus of "economists" across the world who are also increasingly critical of negative yields. It's becoming a consensus. And it's about time! QE and negative rates haven't helped; they've hurt and caused damage to retirees, pension funds, insurance companies and most importantly the banking system (especially Europe).
So, we're one populist revolt in a single EU country like Italy or Greece leaving the EU that could begin a real bond rout. Or what if Germany left the EU? What if the ECB decides to abandon the QE effort now that there is consensus that it's actually crazy?
It’s mindboggling to think about the chain of events that could unfold. Greece recently priced some bonds with negative yields, which is clearly insane. If any EU country leaves, like Greece, their bond prices would drop 80% overnight to drive their yields to 5%, 6% or maybe 10% from -0.5%. The same effect if QE is suddenly disavowed, bond prices across the EU would drop very hard--like 40%. This would lead to huge losses in the rest of the world's bonds too!
The effect could include the instant bankruptcy of nearly all EU banks whose effects would spread to the US and World. The ECB itself would be understood to be technically bankrupt. Bank runs could easily erupt since depositors are at risk in the EU in the event of a bank bankruptcy. A flood of money to the US would ensue. The dollar would rocket higher as US interest rates rise dramatically.
Remember, the world-wide bond market is valued at least $110 Trillion and the world's stock markets are "worth" some $40 Trillion. Losses in a combined stock and bond rout could be something like 70% or $110 Trillion wiped-out in a very short period. $110 Trillion in fiat money would go to "money heaven."
Then, for the real disaster, there is a real possibility that once the bond rout gets going, you’ll wake up one morning and the stock futures markets are halted limit down! And then stock markets stay limit down for days or weeks and don’t or can’t re-open! When they reopen, they are down 80%. This is not an insane concept. The entire worldwide Central Bank bubble can get wiped-out within months. Scary stuff!
This is how “excess” money goes “poof”. And, in our fiat world, far too much money/credit has been created and will likely go “poof." The world would be instantly be plunged into a deep depression especially with Central Banks understood to be bankrupt.