Peak Debt – -Why The Keynesian Money Printers Are Done

Bloomberg has a story today on the faltering of Draghi’s latest scheme to levitate Europe’s somnolent socialist economies by means of a new round of monetary juice called TLTRO – – $1.3 trillion in essentially zero cost four-year funding to European banks on the condition that they expand their business loan books. Using anecdotes from Spain, the piece perhaps inadvertently highlights all that is wrong with the entire central bank money printing regime that is now extirpating honest finance nearly everywhere in the world.
On the one hand, the initial round of TLTRO takedowns came in at only $100 billion compared to the $200 billion widely expected. It seems that Spanish banks, like their counterparts elsewhere in Europe, are finding virtually no demand among small and medium businesses for new loans.
Many small and medium-sized businesses are wary of the offers from banks as European Central Bank President Draghi prepares to pump more cash into the financial system to boost prices and spur growth. The reticence in Spain suggests demand for credit may be as much of a problem as the supply.
The monthly flow of new loans of as much as 1 million euros for as much as a year – a type of credit typically used by small and medium-sized companies – is still down by two-thirds in Spain from a 2007 peak, according to Bank of Spain data.
On the other hand, Spain’s sovereign debt has rallied to what are truly stupid heights – with the 10-year bond hitting a 2.11% yield yesterday (compared to 7% just 24 months ago). The explanation for these parallel developments is that the hedge fund speculators in peripheral sovereign debt do not care about actual expansion of the Spanish or euro area economies that is implicit in Draghi’s targeted promotion of business lending (whether healthy and sustainable, or not). They are simply braying that ‘T’ for targeted LTRO is not enough; they demand outright sovereign debt purchases by the ECB – -that is, Bernanke style QE and are quite sure they will get it. That’s why they are front-running the ECB and buying the Spanish bond. It is a patented formula and hedge fund speculators have been riding it to fabulous riches for many years now.

This post was published at David Stockmans Contra Corner on September 26, 2014.