Is There Any Way Out Of The ECB’s Trap?

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Zero HedgeThe ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially risky. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse.

Ask yourself a question.

Would you buy bonds from a heavily indebted state that has stopped its reform impulse with a 10-year yield of less than 2%, if the ECB did not buy them back? Exactly. No.

With more than 8 trillion dollars of bonds with negative yields, the risk of a bubble is huge, because it would lead to large nominal and real losses in thousands of pension plans that only invest in low risk fixed income assets. The interest expense savings that many states boast of, has been largely at the expense of pensioners and savers. more …

Opinion: Pension time bombs are not just a US problem. Mario Draghi, the European Central Bank (ECB) Chairman is in an even worse fix than his US counterpart. The Federal Reserve has been able to ever so slowly raise short term interest rates without collapsing the stock and bond markets while the ECB doesn’t dare.

The trap began during the 2007-9 financial crisis. Central Bankers created new fiat currency to purchase toxic mortgage bonds from banks. The net result was a drop in interest rates to zero in the US (sub-zero in the EU).

Conundrum:

  • The EU has more than €8 trillion of bonds with negative yields
  • European pension plans are dependent on low risk government bond yields to make payments to retirees
  • If the ECB raises interest rates, existing bonds will decline in value making the pension  crisis even worse
  • If the ECB keeps interest rates at zero, new money invested into pensions will not provide enough income to make future pension payments to retirees

In our post yesterday, our reader VS pointed out “The pension system time-bomb is an interesting one since it has the potential to be a particularly divisive element within the middle-class. People who worked their whole lives under the promise of being given a guaranteed income (pension) at retirement will not ever agree to reduce their monthly payments. And those in the private sector who do not enjoy such guarantees at retirement are finally learning they are subsidizing these benefits. It’s similar to how Northern Italy is subsidizing the southern region. When this mess finally hits the fan, the fighting will be unbearable.”

US Government bureaucrats and central bankers are busy devising new schemes to patch up the pension mess similar to the quantitative easing fix of 2008-9: create more debt.

The plan is to issue legislation that would allow struggling multiemployer pension funds to borrow from the U.S. Treasury to remain solvent called the Pension Rehabilitation Administration. The funds would come from the sale of Treasury-issued bonds to financial institutions.

When that scheme fails governments will have little choice but to turn on the printing machines to bail out millions of families who will see their benefits slashed. The final economic collapse as described in Revelation 6:5-6 will be sudden, and if my understanding of Daniel 7:23-24 is correct, it will begin in the EU.