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ECB’s €2.3 Trillion QE Will Hurt Canada
Mario Draghi has at at long last defined what he meant that he would do ‘whatever it takes’ to protect the Eurozone economy. His announcement of his intention to grow the balance sheet of the ECB from its current €2.2 trillion to €4.5 trillion through the Outright Monetary Transactions Program.
This essentially means the distribution of Tier 1 capital to the top banks in the Eurozone food chain, which will inevitably translate into a fractionally banked 8-12X effect in extended credit.
Where will that money go? Will it be invested in infrastructure build-out, as per the commitment of the members of the G20 at the conclusion of the summit in Brisbane, Australia in November? Will be loaned to companies seeking to invest in their productivity? Will it create jobs? Or will it, like the vast majority of the roughly $3.2 trillion that the U.S. fabricated out of thin air in the name of ‘Quantitative Easing’, merely provide a mammoth capital injection to the discretionary trading desks of the upper echelon of the financial food chain, to be wagered among each other on synthesized derivative instruments that have zero positive effect on the broader economy?
Not that the entire $3 trillion was retained in the dark pool universe of derivatives. Record highs in the U.S. stock indices are attributable to the secondary loaned capital arising from the Tier 1 trillions. And that, at least, has the effect of generating employment and wealth in the form of capital gains to those in the upper tiers of the economy.
The overall effect of $3.2 trillion of capital fabrication in the U.S. since 2008 has been highly deflationary to both commodities and Canadian industry as a whole.
While a commitment to invest at least some of the planned trillions of Euros in QE in infrastructure would have a positive effect on demand profiles for industrial and base metals going forward, the overall effect of QE is really deflationary in the long term.
As the money filters down to large capital pools like hedge funds and leveraged buyout funds, these entities, which were of a size that restricted them to industries like real estate, commodities, equity investment, etc. are suddenly so capitalized that these markets become less attractive due to their finite size and higher risk. Why invest in long time horizon (thus higher risk) opportunities when they can keep their money close in short term synthetic derivative transactions with 30 to 90 day durations?
How QE actually reinforces the deflationary spiral and cycle.
So in a tremendous paradox, QE, initiated to try and stave off deflation, actually induces it across the layers of the real economy, while the ethereal rarified air of the top layers enjoy investment inflows. The only benefit of that in the real economy is when the fat cats need their grass cut or pool cleaned.
Looking forward to 2015 Deflationary Effect in Canada
I suppose the upside is that the collapse in oil prices, metals, and by sheer proximity, all other smaller businesses is that things are going to get cheaper. The unfortunate reality is that while prices for gasoline, lumber, copper and the products which count such commodities among their significant costs provide some relief in household expenditures, the lost income from household balance sheets as a result of layoffs and corporate opportunity contraction means that benefit is muted. As a commodity-based economy, Canada will suffer acutely the deflationary ravages of European QE.
For Canadians, this will translate into a housing market reversal in 2015, which is good news for home buyers who have a lot of equity. But if the Fed starts raising rates (and other central banks follow) at the same time the housing market grows weak, Canada might soon be following in Russia’s recessionary footsteps.
The post ECB’s €2.3 Trillion QE Will Hurt Canada appeared first on Midas Letter.
Source: http://www.midasletter.com/2015/01/ecbs-e2-3-trillion-qe-will-hurt-canada/
