If you want to know where the global experiment in massive money printing is heading—-just take a look at the monetary madhouse in Europe. And that particular phrase has full resonance once again as it becomes more apparent by the hour that Europe and the Euro were not fixed at all. Indeed, beneath the surface of Draghi's “whatever it takes” time out, the crisis has been metastasizing into ever more virulent deformations.
The coming European monetary crack-up is rooted in the fact that the ECB's financial repression and ZIRP policies have—like everywhere else—-destroyed honest price discovery in Europe's massive sovereign debt market.There is no other way to explain the preposterously low 10-year bond yields prevailing this morning for the various and sundry fiscal cripples that comprise the EU-19.
In the wake of Hollande's two odd years of serial tax, regulatory and fiscal blows to his nation's economy, for example, why not load-up on some French ten-year bonds at a yield of 0.78%? Yes, the French benchmark bond is now trading in Japanese style basis points, not the whole integers that French state debt has carried since the time of the Black Plague. Indeed, today's miniscule yield is but a tiny fraction of the rates prevailing in more recent times, including the 3.5% rate at the bottom of the global financial meltdown in late 2008.
But never mind. What could go wrong that might possibly warrant a few hundred basis points more of yield in compensation for an investor's risk? A skeptic might mention principal loss to inflation, credit risk owing to France's headlong fiscal deterioration and, most especially, the possibility that the euro goes kaput and bondholders get paid in something else—say Madame Le Pen's depreciating French francs.
Not to worry rejoins 78bps of yield. Apparently, inflation has been abolished once and forevermore—-implying that today's razor thin nominal yield does not require headroom for principal erosion due to a higher price level. Yet the only evidence for that is a small downward blip in the French CPI since world oil prices began their plunge last summer, which resulted in a December y/y inflation rate of 0.5%.
