Illusioned by the Economic ‘Recovery’

Jon Banking, Blogosphere, Economy, Gold, Market Commentary, Precious Metals, Real Estate

This is an excerpt from the latest Global Gold Outlook Report (full paper). Take a free subscription to receive similar updates in the future via e-mail: http://www.globalgold.ch.
Europe’s economy is at a standstill. This summer was full of critical developments in the Eurozone: In June, the European Central Bank (ECB) decided to move into the territory of negative real interest rates! The deposit rate, which already was at 0%, was cut to minus 0.10%. Additionally, its refinancing rate was cut from 0.25% to 0.15%, and its marginal lending facility dropped to 0.4%. This was one of a package of measures the ECB said it was considering to combat disinflation in the Eurozone and give the economy a push. Due to the continued dim outlook of the economy, the ECB further reduced the deposit rate to minus 0.20% and the refinancing rate to 0.05% in early September.
In our first Outlook back in December 2012 we discussed measures of financial repression in our financial markets. The first one we listed was that of negative real interest rates and we expressed our concern of it continuing for some time. That the ECB resorts to this option comes as no surprise, the economy has been close to a standstill in the past two years and European debt levels remain alarmingly high. What better way to reduce the cost of debt? And as a bonus, banks are charged to pay the central banks for their deposits. Of course, these costs will shift to deposit holders who, as we stressed before, will not only lose money in real terms, but potentially in nominal terms as well.
Asset-backed securities… again? To further encourage credit supply in the continent, the ECB also mentioned it will launch its targeted longer-term refinancing operations (TLTROs), an enhanced and improved bank lending mechanism (excluding mortgage lending). Auctions are scheduled for September and December this year. An initial USD400 billion will be up for grabs! But the biggest revelation was that the ECB would start a US-style bond-buying facility by purchasing asset-backed securities (ABS) from banks.

This post was published at GoldSilverWorlds on September 11, 2014.