Draghi and the Chocolate Factory

So it began.

The long debated Euro zone quantitative easing (QE, or money printing) program finally hit the ground in March 2015. Slammed by the double whammy of the 2008 global financial crisis and the PIIGS (Portugal, Ireland, Italy, Greece and Spain) bond crisis shortly after, Mario Draghi, president of the European Central Bank (ECB), had let it be known to the world that he had a bazooka in his pocket and threatened to ‘do whatever it takes’ to take the Euro zone out of its deflationary spiral. The market called his bluff and he was forced to use the bazooka.

The bond buying program using money printed out of thin air amounts to roughly €60 billion (US$63 and dropping) a month starting March 2015 through September 2016 for a grand total of €1.3 trillion, with an option to print some more if it does not work.

The stated goal: to create a medium term inflation of 2% in the Euro zone.

The Euro zone is the latest but pretty much the last major economic block in the global economy to embark on its path of zero or negative interest rate policy (ZIRP/NIRP), money printing and currency destruction. The US (QE1, QE2 and QE3 in succession), the UK, Japan and China have had their printing parties at different times and with varying quantities since 2009.

Even before the onset of the Euro zone QE program, the ZIRP has already driven most of Euro zone bond yields to ridiculously low levels across the entire spread spectrum.  As the Bloomberg chart shows below, in anticipation of the QE program, more and more bond yields from the 18-member Euro zone turned negative over time, to the point now where fully 25% of all bonds have negative yields.


Percentage of Euro zone bonds with negative yield over time
Percentage of Euro zone bonds with negative yield over time


% of bonds with negative yields across Euro countries

% of bonds with negative yields across Euro countries

In core Euro zone countries like Germany, Finland and the Netherlands, close to half of their bonds already have negative yields. Not only does the commencing of QE mean that the majority of these core country bond issues will yield negatively, pretty soon the weaklings, the likes of which include Spain, Ireland and Italy, and which barely a couple of years ago were on verge of bankruptcy and were shut out of the debt markets because of the yield blowouts, will be able to issue more debt at zero interest rates.

Another bizarre outcome: these bond buying operations will be carried out by the member countries with the amounts determined by the capital key contribution of each individual country. That means for Germany with a 26% contribution and assuming that there is no major funding changes in the next 12 months, the ECB will be buying more than 140% of gross German issuance.

In the extreme money printing department, this just unseated Japan, which under Abenomics and in its latest and repeated failed attempts to revive an economy stuck in the mud for over twenty years, unleashed its bond buying spree last November which called for buying the entire (100%) new issue of Japan government bonds (JGBs) and then some.

The negative yield phenomenon is also spreading to corporate debt and bank deposits.

Nestle, the world famous chocolate maker, saw its Aa2 0.75% corporate notes traded with yields below zero at the end of last September. That’s right, you get to pay for the privilege of parking your money with the beloved chocolate factory.

And following the footsteps of the ECB, Switzerland, Denmark and soon many other European countries, NIRP is landing on North American shores, as JPMorgan, the largest American bank, is preparing to charge large institutional customers for some deposits (WSJ) . Again, as a depositor, you get to pay for the privilege of putting your money in these too-big-to-fail banks. Not only do you not earn interest but rather have to pay some, you get to be bailed in (read the Bail-in At Your Local Bank series) if and when one of these TBTF banks blows up. Return-free risk at its finest.

What does it all mean?

The monetary end game and the inevitable outcome of monetary reset are now in sight.

The world has been in a borrowing binge since the eighties. With the tailwinds of favorable demographics in developed countries and the opening of the consumer markets in China and other emerging economies, this otherwise alarming massive accumulation of debt across the public, private and financial sectors was masked by the apparent economic boom and presented as a virtuous ingredient for growth.

The 2008 financial crisis should have served as a wake-up call. Instead of dealing with the massive debt and reforming the broken financial system, governments captured by private banking interests chose to socialize the banks’ private losses and tried to paper over the problem buy printing ungodly sums of money. The extend-and-pretend strategy, the governments hoped or so it seemed, would buy enough time for growth to resume and fix this temporary liquidity problem.

The flaw with the approach was that it is neither a temporary nor liquidity problem but rather one which is structural and of solvency. As twenty years of near zero interest rate in Japan and three rounds of money printing by the Fed have shown, the economies having been subject to such mad monetary stimuli have little to show for it other than the fact that the TBTF banks have since gotten even bigger and more concentrated and the derivatives time bomb (check out Bail-in At Your Local Bank – Part 2: The Derivatives Time Bomb and A Primer on Derivatives) which almost annihilated the financial world six years earlier is now even bigger.

So what do the central banks do in the face of these repeated failures? They double down.

It should be clear to any rational thinking person that we are now firmly in the monetary twilight zone. The central banks have successfully destroyed the price discovery mechanism of the debt markets and grossly distorted the pricing of risk in the free market.

When the central banks chose to kick the can down the road six short years ago, the end of the road – the monetary end game – despite having ‘Danger Ahead’ signs visible along the way, was still over the horizon and out of plain sight.

Such is no longer the case.

More people are starting to wonder out loud why they cannot see the emperor’s new clothes. The end of the road, although still fuzzy and somewhat indiscernible from the current vantage point, is now definitely in the line of sight.

As more and more creditor nations realize the monetary ponzi game for what it is, many are, at least below the surface, positioning themselves for a fundamental pivot and preparing for the coming monetary reset, a trend change which will have unfathomable impacts to the social-economic and geopolitical world as we know it.





Monetary reset

This article is part of the Monetary reset in-depth topic. Get a crash course and read the latest developments on this topic.


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