Draghi has realized that he has singlehandedly destroyed the European bond market. Besides the fact that it is illegal to short government bonds, he has come face to face with the stark reality that IF the ECB stops buying government bonds, there will be NO BID at these price levels. Interest rates will skyrocket dramatically. On the German 10-year bond, once we see a monthly closing above .79, we are looking at a DOUBLING of rates and that is in Germany. Once rates rise above 1.55, then expect it to rapidly DOUBLE again.
Consequently, Mario Draghi has been warned there is a serious problem. He told the Economic and Monetary Affairs Committee of the European Parliament that he would maintain a very loose monetary policy because it was necessary despite the upturn in the euro area. He said that INFLATION remains critically dependent on a strong push using monetary policy. Of course, you would assume that after 10 years of this policy and there is no sign of a major return of inflation, that you would start to question the entire Quantity of Money Theory.
Draghi said Monday that he will continue to include the billion-dollar bond purchase program and he will reinvest expiring bonds exactly OPPOSITE of the policy at the Federal Reserve. While the dollar-bears keep calling for the end of the Greenback, they are deaf, dumb and blind when it comes to international capital flows or monetary policy outside the USA.
Draghi realizes that he is subsidizing the European governments. He is not stimulating the economy, he simply has them on life-support. Stopping the bond program will lead to a major crisis when there is NO BID for government bonds. Not only will Draghi keep buying government debt, he will be repurchasing debt that has expired. He will not reduce the balance sheet as the Federal Reserve is doing.
Draghi has created the economic NIGHTMARE from which there is no escape. We will be putting together a special report on World Debt market since this is the real crisis we are facing with the Monetary Crisis Cycle that began here in 2018.
