Yesterday, most of the world’s central banks – including the U.S. Federal Reserve, and, somewhat surprisingly, the People’s Bank of China – joined forces to pump greater liquidity into the global marketplace. In short, this involved “putting a lot of dollars out there and making them cheaper.” The move was intended to help out the ailing Eurozone, as CNN explains:
The Federal Reserve, along with five other central banks, acted Wednesday to make it cheaper for banks around the world to borrow U.S. dollars - a staple of global financial transactions.
It's a big move, meant to not only lower the cost of short-term borrowing for troubled European banks, but also keep the global economy free and clear of an all-out credit crunch as in 2008.
"The euro debt crisis is coming to a head after two-plus years of dragging and hand wringing, and I think what these central banks are trying to do is send a signal to markets that there isn't going to be a huge liquidity crunch like there was in fall 2008," said Cornelius Hurley, a Boston University professor and former counsel to the Fed Board of Governors.
European banks are curled up in fetal positions, terrified to do business with each other as the Euro teeters on the brink of disaster. Greater liquidity is supposed to ease their fears and get the wheels of commerce turning again. European banks are getting close to a 50% discount for borrowing U.S. dollars, which will actually bring them below the rate American banks pay.
The markets were happy, as is always the case when short-term relief for an immediate crisis appears. Investors were clearly relieved to see the titans of the Western world doing something, instead of appearing overwhelmed by intractable problems. The Dow went up 489 points, the biggest gain since March of 2009.
Unfortunately, the liquidity surge is a short-term measure that will, at best, buy some time to deal with long-term problems. CNN analyst Paul R. La Monica compares it to a “sugar rush”:
"When you look at what all the central banks are doing around the globe, creating more liquidity is significant but it's not going to solve the world's problems," said David Hefty, CEO and co-founder of Hefty Wealth Partners in Auburn, Ind.
Still, Hefty noted that it is telling that central banks seem to realize that they have to show investors they are not going to sit idly by and that they are willing to cooperate.
"The message is they recognize the severity of the problem and they are committed to working together. We hadn't really seen that commitment before," Hefty said.
At the same time, one has to wonder if investors are too blinded by the liquidity sugar rush to consider that the deluge of central bank news is really a sign of just how dire the issues in Europe are right now.
The U.S. economy actually doesn't look so terrible in comparison to Europe. It's still sluggish but it doesn't seem to be on the verge of a double dip. In addition to the Fed news, there were better-than-expected reports about jobs and manufacturing Wednesday.
Still, the Fed is acting like it needs to prevent another 2008. That's telling.
Does messing around with the value of the dollar, on a global scale, make that double-dip U.S. recession more, or less, likely?
At RealClearMarkets, Larry Kudlow thinks it’s a Tylenol gel cap, rather than a sugar pill:
Basically, the Fed is making it cheaper for Europe to borrow dollars. And this dollar backstop symbolically shows that the Fed, the European Central Bank, and other big central banks are not going to permit a 2008-type credit freeze and financial meltdown.
But in terms of Europe's overall problems, with governments unable to live within their means, and with investors on strike against government bonds and a very shaky banking system, the Fed action is really like taking a Tylenol gel cap. Might help the headache in the short run. But the fundamental illness is unaffected.
[…] But a dollar shortage is not Europe's problem. As of the weekend of November 23, foreign central banks had tapped the Fed for only $2.4 billion of dollar loans. This is very small. In December 2008, during the height of the financial crisis, foreign central banks borrowed $580 billion.
The European problem is a ballooning welfare entitlement state that is bankrupting most of Europe's governments. And high European tax rates are strangling economic growth. And the debt that private investors won't buy is held by a banking system that is increasingly vulnerable. And Germany, the strongman of Europe, doesn't want to pay to bail out the southern countries or anyone else - including, it would seem, France.
In short, nothing has been solved in Europe. The Europeans are not yet helping themselves. Why should the ECB write a trillion-dollar check to near-bankrupt governments? And how can the IMF borrow $800 billion from the ECB to give the same troubled governments even more money? And remember, the U.S. owns nearly 20 percent of the IMF. Is Congress really going to sign off on this massive ballooning of its mission and balance sheet?
(Emphases mine.) That’s the basic systemic problem of the entire 21st-century Western world in a nutshell, isn’t it? We’ve entered a period of desperate stopgap measures designed to pump “liquidity” into frozen systems. From Washington to the capitals of Europe, it’s all about cadging a few more dollars – and yesterday’s liquidity action emphasizes that it really is dollars – to help doomed wastrel governments limp along to the next budget crisis. Each rescue move, from jacking up the U.S. debt ceiling to “soak the rich” tax hike fantasies that never produce as much government revenue as promised, serves to alleviate the enormous pressures that might otherwise produce an outbreak of fiscal sanity.
In the United States, we raised the debt ceiling, releasing the accumulated pressure that forced even the biggest spending President in history to pretend he was a deficit hawk for a few weeks… and we ended up with a useless “Budget Control Act” that barely qualifies as a speed bump to government growth, its epitaph written by a “Super Committee” that couldn’t even produce symbolic fiscal restraint. We’ll be looking at the debt ceiling again soon – perhaps even before the 2012 election – and Washington will try the same damned thing again.
Now we’ve got liquid cash pumped into a European network of leaky financial pipes that feed into basket cases. Maybe the Eurozone’s leadership will use the brief respite they’ve been granted to do something responsible and significant, but the past hundred years of Western history argue in favor of skepticism. A hundred years ago, angry Germans were the menace of Europe; now they’re its only hope for survival.
Noted Federal Reserve critic, Monetary Policy Subcommittee chairman, and presidential candidate Ron Paul took a dim view of the liquidity sugar rush:
Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily run into the trillions of dollars. These dollar swaps are purely inflationary and will harm American consumers as much as any form of quantitative easing.
The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending. Citizens the world over deserve better than this. They deserve sound money that cannot be manipulated and created out of thin air by central planners who promise printed prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure, we need real monetary reform. We need sound money.
Perhaps, in the end, the difference between fiat currency and sound money is the difference between sugar highs and crashes, versus a nourishing diet of stable government.
