In this particular case, instead of stimulating business lending or higher prices, the decision will only stimulate the increased buying of insolvent government debt – leading us all one step closer to the economy’s eventual unraveling.
Since the announcement earlier this month, banks have skirted around the negative interest rate imposed by the ECB via the purchasing of government bonds. These are the perfect vehicles for banks, as they are considered “virtually” risk free securities.
We can see this has already started occurring if we examine the yield on a couple of 10-year eurozone bonds. Keeping in mind that the yield on a bond is inverse to its price, take a look at the charts for the Spanish 10-year bond and the Italian 10-year bond. The yield on both bonds has dropped.
It should be obvious that this measure has and will continue to allow governments to borrow more money and more easily roll over their existing debt obligations. However, more importantly – and more dangerously – it increases the net exposure that banks (and their customers, who are you and me) have to the promises of insolvent governments. This could spell real trouble for anyone that hasn’t already removed their capital from the financial system with gold or silver.
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