Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.
That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.
Apparently, no one believes in capitalism anymore. Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.
While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. 
It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices. So they keep digging.
A Bigger Bazooka
A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.
At the time, he called the bond-purchasing program a “big bazooka,” but apparently, the bazooka wasn’t big enough, because last week he announced that the ECB would double-down on its program and purchase €80 billion in assets per month through, at least, March 2017 “or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.”
That €80 billion translates to $87.9 billion, making it even larger than the $80 billion the Fed was spending each month on bonds during the peak of its QE program.
And that’s not all! The ECB also announced that it will begin purchasing high-grade corporate bonds along with the government bonds it’s been purchasing. But just as the ECB has to purchase bonds from barely functioning countries so that it doesn’t create the appearance of favoritism, maybe it will be purchasing corporate junk bonds in the not-too-distant future.
ECB’s march deeper into fiscal insanity is a five-step program that also includes lower interest rates. The new rates of 0.00% on the main refinancing operations of the Eurosystem and 0.25% on the marginal lending facility represent reductions of only 5 basis points, but the rate for deposit facilities dropped 10 basis points to -0.40%.
When the ECB dropped the rate for deposit facilities from -0.10% to -0.20% in September 2014, we called it less than less than zero. Now it’s less than less than less than zero.
As The Wall Street Journal put it, “Mr. Draghi threw the kitchen sink at Europe’s deflation and slow growth, plus the stove and toaster.”
An Unexpected Impact
But, alas, even if he threw in the dishwasher, refrigerator, cabinets and kitchen table, it may not have been enough. As the chart shows, markets did not take too kindly to the drastic measures taken by the ECB.
Corporate bonds reacted favorably, which would be expected given the new market for them, but stocks and government bonds tanked, while gold soared and the euro strengthened against the dollar. These short-term results had to be the opposite of what was expected.
Draghi, we might add, had a Hobson’s choice before him. Making a strong statement by upping the ante with even more stimulus may not help the economy, but if he went wimpy on QE, the markets would have suffered and he would be blamed. That’s what happened as recently as December. So, Draghi is just giving the markets what he and just about everyone else thought they wanted.
Zerohedge noted that, “With gold soaring and bonds and stocks tumbling, it suggests the age of central banker omnipotence is at an end.”
We can only hope so, although we should all be worried about what happens next. Will the Fed respond with negative interest rates or, at the least, delay further rate increases? Will China and Japan follow the ECB’s example?
The result will likely be a currency war. Like a trade war, in which countries keep adding new tariffs until trade comes to a halt, much of the world will continue stimulus programs that lower interest rates and weaken their currencies, giving them a perceived edge in international trade.
Of course, when much of the world is following the same strategy, everyone loses.