Peter Schiff recently explained how the Federal Reserve has rigged the US Treasury market. Well, the European Central Bank has taken bond market manipulation to the next level.
According to a Bloomberg report, the ECB is buying bonds to control the yield spread between debt issued by various EU countries. As a result of this central bank mechanization, the spread between the yields on German and Italian bonds has remained “remarkably stable” despite the Italian government teetering on the verge of collapse.
Negative-yielding debt surged to over $15 trillion earlier this month. This pile of negatively-yielding paper includes government and corporate bonds, along with some euro junk bonds.
In a recent episode of the Wolf Street Report, Wolf Richter called this “NIRP absurdity.” And it could be coming to America.
Negative interest rates started out as a short-term emergency experiment during the Great Recession. Now it has turned into the new normal. How will this end?
Christine Lagarde will take over the reins of the European Central Bank in November. The financial markets seem to love the pick. We should take that as a warning sign.
We focus most of our attention on the Federal Reserve. But other central banks around the world also contribute to global financial instability. For instance, the European Central Bank has injected trillions of euros into the EU economy with more than a decade of quantitative easing and interest rates below zero. And like Federal Reserve policy, all of this monetary stimulus has blown up giant asset bubbles.
The Federal Reserve held its June Open Market Committee Meeting this week and it looks like Powell and company are fresh out of patience. In fact, that word didn’t come up once. And while the Fed held pat on interest rates, for now, virtually everybody is betting on a rate cut in the near future. This has caused gold to surge to prices not seen in nearly six years. Meanwhile, American consumers are still running up debt and the Chinese are shedding it. In this episode of the Friday Gold Wrap, host Mike Maharrey talks about it.
All eyes will focus on the Federal Reserve as it wraps up its June meeting. But it’s important to remember the Fed isn’t the only game in town. Moves by the European Central Bank also have a significant impact on the global economy (and the gold market) and it has taken a decidedly dovish turn.
Most analysts expect the Fed to hold interest rates steady in June, but potentially set the stage for a July rate cut. (Although Jim Grant said he thinks the Fed will actually cut this month.)
In this week’s Friday Gold Wrap, Mike Maharrey covers some more bad signs in the economy, including rising oil prices, an unexpected drop in retail sales and a surge in negative-yielding government bonds. At best, it looks like the economy is slowing down. Or it could be the prelude to the next crisis. This raises an important question: who’s going to save us? Mike suggests we probably shouldn’t be counting on the politicians or the central bankers.
Last week we reported that the yield curve on US Treasurys had inverted after the yield on the 10-year fell below the yield on 3-year bonds for the first time since 2007 – the cusp of the Great Recession. This has historically been an early-warning sign signaling a recession.
Now we have some more bad news for bond markets – this time on a global scale. The amount of government debt with negative yields has vaulted back above the $10 trillion mark and now makes up a full one-fifth of the global bond market.
We often criticize the Federal Reserve for its three rounds of quantitative easing. Coupled with artificially low interest rates, Fed QE stimulus — essentially money creation –pumped up all kinds of asset bubbles. Now that the US central bank is trying to tighten, we’re beginning to see the air seep out of those bubbles.
But when it comes to QE, the Federal Reserve has nothing on the European Central Bank. The ECB just announced the end of its QE program this month. The ECB’s QE purchases totaled somewhere in the neighborhood of 2.6 trillion euros. The bank also pushed interest rates below zero. So, what did the EU get for all this stimulus? Not a whole lot.
At this point, the European Central Bank isn’t nearly as keen on raising interest rates as the Federal Reserve. The ECB announced Thursday it would likely hold its interest rate steady at zero through the summer of 2019.
“We decided to keep the key ECB interest rates unchanged and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary,” ECB President Mario Draghi said during a press conference.
As Peter Schiff pointed out in his most recent podcast, nobody expected the dovishness of the ECB and it roiled the markets. But ultimately, he thinks the Europeans will try to fight the wave of inflation that is about to engulf the planet. Meanwhile, the Fed probably won’t.