QE was announced in EU in October 2014. This was the formal announcement by the EU Central Bank "director" Draghi. It could not have been otherwise since the amounts of money to be printed out of thin air vastly surpassed the amounts of money that where printed out of thin air up to date. The unofficial QE called "asset purchase program" was getting too small for the massive amounts that needed to be printed and so the EU Central Bank engaged in a sort of "disclosure" exercise for something they knew they could not hide. The announcement was that about 1 Tera EURs (Trillion for you yanks) are to be printed.
Now, those facts and those numbers mean absolutely nothing to the everyday Joahim and Adalina. They couldn't care less. All they care about is to get to the end of the month with sufficient money to pay for food, rent, clothing and other necessities. Yet, QE is having and will continue to have incredibly bad effect on their pockets. Take a look at the graph below.
This graph indicates the price of one EUR in USD. As you can see since the moment it became obvious to the FOREX market that QE will be implemented, the price began to drop like a stone. Markets tend to anticipate events, not to follow them.
Now, going back to our point and from the graph we can easily estimate that in the span of about 8 months the EUR lost approximately 25% of its value. Who cares right? Well Europeans do. Why is it so? Because a great deal of goods and services consumed in EU are imported or heavily dependent upon imports, oil being one of them. What do you think will happen when all those industries operating in EU or all those importers suddenly have to pay 25% more for their industrial or wholesale goods just because the EUR depreciated against the USD? What would you do? Simple right? Pass the cost increase to the consumer. Presto! Overnight prices in EU land should begin to rise. Halleluiah!!! Inflation is here!! Finally! Joahim and Adalina are saved now that they have to pay up to 25% more for their necessities! All glory to the EU Central Bank that stoked the flames of inflation!!
Oh…wait…hold on…they will have to pay 25% more for their goods and services… hummmm… will they get a 25% rise in salary? Well…no. Then… how exactly are they going to be "saved" by this "bold" action of the EU Central Bank? We don't know since Draghi is not answering our e-mails (for some strange reason).
But the story does not end here. The "mainstream" interpretation is that this drop in the value of the EUR does not matter because now companies have "cheap" long term money and they can invest which will "stimulate" the economy. But if Joahim and Adalina are tapped-out they won't buy more stuff. And the cost of imported industrial and wholesale goods and services just went up 25% which means that companies won't be able to pass on to consumers their increases in cost.
Hummmm… costs are rising… consumers are not buying… companies can't increase their prices… their profit margins trend towards loses… what do you think an EU company is going to do?
Well, you don't have to think. For that we have Argentina. We will tell you what happens next.
A whole bunch of companies will go bankrupt. These would be the suckers who believed in the fairy tales the EU Central Bank is spinning.
A whole bunch of companies will limp along surviving as best as they can.
A few large companies will become shell companies producing nothing and playing the market through arbitrage making huge profits of the Central Bank
Basically, most EU companies are screwed and EU consumers along with them. But not to worry, because, eventually, hopefully the EU GDP will rise again like an overdone chicken from the oven: in smoke.
And if all this would not be enough, we need to consider the effects of the ridiculously large amounts of money that were created. Right now and for the near future, this money won't enter into the market simply because companies are not borrowing. As a consequence of this, there will be little to no inflation due to printing. However, eventually, all this money will enter the market once companies resume borrowing. At that time the 1 to 10 rule for bank "reserves" will kick-in and all this money will be multiplied by 10. What do you think will happen in EU once 10 Tera EUR flood it? That's easy to estimate. The M3 value (broad quantity of available money) is of about 13 Giga EUR. If we now divide 13 Giga EUR into 10 Tera EUR we get a ratio of "only" 769 to 1. If we convert this to a percentage we get 76900 %. That's right; we can estimate that in the worse-case scenario there will be an inflation of roughly 77000%. This number is well in the realm of hyperinflation. The best-case scenario points to an inflation 10 times lower, which is in the order of "only" 7700%. Consider this. An inflation in the order of 15% creates chaos in the markets, what do you think will happen in EU with an inflation of "only" 7700%?
So the next time you hear the glorious "directors" and "chairman" (or chairperson) of glorious Central Banks announcing that "bold measures" or simply "measures" are to be taken to combat whatever it needs to be combatted, brace yourself. The powers that be are about to start messing with the market and this can only bring about misery.
Unless you are "connected". Unless you play the bond market, are good at market timing and have sufficient funds to make bets profitable. Then, you will not only survive but thrive. Good for you.
On the other hand, not so good for the Joahims and Adalinas out there. They are veritably screwed.
It is now your choice whom to believe, but we believe that the chart above has already made the point for us.
Note: please see the Glossary if you are unfamiliar with certain words.
