Who supports the financial markets?
On Thursday, September 10, the ECB Governing Council will meet to decide how to continue supporting the European economy. The same will be done by the FED the following week for the United States. Meeting scheduled for September 15 or 16. Decisions will be made based on new data on the economy coming in.
Never has the gap between finance and the real economy been so far apart as it is at this time in history. Markets continue to rise (some more, some less), while the economy sends us back some negative and worrying data.
And so, who supports the financial markets so much?
Perhaps central banks.
To support the economy there are mainly two ways:
1) Lowering interest rates so that businesses and citizens can tap more liquidity more advantageously. At the moment neither the ECB nor the Fed, however, seem to want to go down this path. Rates are now close to zero and they do not intend to proceed with negative rates (ECB deposit rates are as low as -040%).
That leaves only the other possibility:
2) Printing money and buying government bonds
All this additional liquidity injected into the market expands the monetary base and stimulates the economy by buying the debt of various states. States (including Italy), needing money to support their struggling businesses and families, sell securities (called government bonds) on the market, and the buyer will be entitled, after a period of time, to the return of the full amount with interest on top of that.
Again, however, interest is so low that few investors find it worthwhile to buy government bonds.
The central banks in this situation decided to buy them, in a big way, the debt of the various states at near-zero interest rates. This form of “rescue” with large amounts of money to buy so many government bonds is also called a“Bazooka,” just to convey the disruptive force of this financial action.
This “economic structure” cannot be infinite because all this debt that keeps being injected will have to be repaid sooner or later.
And who will pay for it?
Expect in the coming years (perhaps decades) cuts in public services and an increase in taxes.
To save our present we need to make more debt. We have no other solution as of today. To save our future and that of the next generation we should try to make as little debt as possible, because then it will be up to them to pay it back with fewer public services (schools, health care, pensions) and higher taxes.
It is a very precarious balance that we absolutely must keep in mind. So it will also be important to see how the various governments, with all this new liquidity, intend to spend it. Whether “plugging holes” or investing them, making them a strong lever for the economy.
If with all this money we can boost the economy such that on the one hand we create more jobs (more income for families) and on the other hand we save money (by producing, for example, renewable energy) we would have the possibility that the debt can be partly repaid more easily and with less sacrifice, since more work also means more taxes going into the state coffers.