Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens.
A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend checking the podcast out in its entirety – there is a lot more than is covered by the summary).
Mark Thornton and Claudio Grass
Photo via mises.org
TARGET-2 balances in the euro zone belie the “everything is fine” narrative. They show that capital flight remains a major problem, with Spain and Italy at the forefront, as their citizens evidently remain wary of their banking systems. It should be no surprise that the ECB remains extremely reluctant to stop its QE operations, although it has at least begun to “taper” its purchases (it is doing so mainly for lack of bonds to buy in certain countries – if it wanted to keep the purchases going at their current level, it would have to shift the weighting of the purchases from the ECB capital key toward buying more peripheral and fewer core country bonds, which would presumably be strongly resisted by ECB Council representatives from Germany, the Netherlands and others). [PT] – click to enlarge.
We currently find ourselves in a historically and economically significant transition period. The already overstretched bubble in the markets is still expanding, but we now see bold moves by the Fed to reduce its balance sheet, at the same time the ECB plans to taper, overall presenting us with a fairly deflationary outlook. This reversal of the expansionary policies of the last decade can be seen as the first step toward a potentially ferocious correction in the not-too-distant future.
The ECB is trapped, as it already holds 40% of euro zone sovereign debt. At the same time, Spain, Italy and Greece continue to potentially present major challenges, as a banking crisis could easily reemerge in these countries [ed note: banks in Europe have managed to boost their capital ratios, but the amount of legacy non-performing loans in the system remains close to EUR 1 trn. Moreover, TARGET-2 imbalances have recently reached new record highs, a strong sign that the underlying systemic imbalances remain as pronounced as ever]. Mario Draghi intends to reduce the ECB’s asset purchases from EUR60 billion to EUR30 billion per month. He may soon realize that if the ECB does not buy euro zone bonds, no-one will.
Ultimately, this could lead to a massive flight to the USD. The US still has the biggest capital markets, controlling 52% worldwide compared to Europe’s 9.8%. Stock prices may rise even more in this scenario, but more importantly, the USD would strengthen, which practically nobody wants. Such a development would be seen as a threat …read more
Source:: Acting Man