The Draghi Put Will Be Stillborn

Maybe it will work for another day or so. But longer term? Nah. Mario Draghi in a prepared speech in London said. “Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.”

Wow! I am impressed. Let us all run out and buy stocks. But wait a second? Why should anyone believe him? What has Draghi or any other European central banker said that has actually happened? NATO. No Action Talk Only.

The Biderman Market Theory says that every market has a house and players. In the euro market, the house is the ECB. The euro is down 5% so far this year and was plunging en route to parity before Draghi’s speech. Obviously the house in the euro market has a vested interest in saving the euro! After all if there's no euro, there's no need for European central bankers? What is more, apparently, it is not a crime if central bankers lie! So in other words, Mr. Draghi is talking his book. Talking your book is Wall Street jargon for automatically touting your holdings. Captain Renault, I am shocked, shocked that touting is going on in the euro back room!

When I started doing these videos last November, I said Europe is a slow motion train wreck. Eight months later the train is not only going faster but we are running out of track. Mr. Draghi says he will do whatever it takes to save the euro. What can he do? All that the ECB can do, that it has not, is in essence print money that ultimately Germany will have to guarantee.

While it is possible that Germany would agree to trillions in money printing, I think that is still a long shot. However, even if Germany did agree, I say it will not make any real difference long-term other than creating a short-term rally in stock prices.

Let us step back and look again at the European big picture. What I see is a bunch of economies whose citizens are making less money than before. And even before the current recessions European economies were not generating enough taxable income to pay current government expenses. Now, a worsening recession means there will be less taxable income for governments to fund ever-growing entitlements. Add that to a huge pile of moldering away bad debts. And what I see is not a solvable problem the way the world works today.

Neither Draghi nor any of the bankers even bothers to talk about the real problem of not enough regional income and too much government spending. Draghi’s only solution is some form of money printing. Printing money to pay bills maybe will work over the short-term. But long-term, it cannot. If money printing works in the real world why not print and give everyone a billion dollars, euros or yen?

The most Draghi can do is have the ECB print money to service existing bad debts made by banks and governments. But printing money to pay interest and principle on loans is not debt service! That is called money printing, debasing the currency whatever. Yes, governments want to do whatever is possible to avoid bad times for its citizens. But, as someone else once said, the road to hell is paved with good intentions.

Below you may find the video.