Europe Needs a 'Bazooka'
Like the U.S. Federal Reserve
"The
Americans have been stunned that Europeans would abandon their strongest
weapon. For months now, U.S. President Barack Obama and his Treasury Secretary
Timothy Geithner have called on Europeans to unpack their greatest weapon …
investors hope beyond hope that Europeans finally learn from the U.S. and start
firing that ECB 'Bazooka.'"
Members of Occupy Frankfurt set up this 'fire sculpture' in front of the Euro sculpture at the European Central Bank building in Frankfurt, Germany, Nov. 3.
The sum is enormous: America's
debt has reached $15 trillion. Yet that doesn't seem to bother anyone.
Undeterred, investors shovel their money into the United States. For a ten-year
government bond, the U.S. must pay only 1.9 percent interest. That's not just
next to nothing, it is less than nothing. After all, inflation is at 3.53
percent. So investors are actually losing money when investing in the U.S.
More amazing still: Even the
turbulence of U.S. politics doesn’t seem to shake investors. Calmly on Monday,
they witnessed the U.S. Congress unable to even agree on an austerity program.
As if nothing had happened, the returns for U.S. government bonds remained
sensationally low.
Europeans can only be
envious. Most euro-countries have far less debt than the U.S. - and still E.U. monetary
union is headed toward bankruptcy. The Spaniards must now pay about 7 percent
interest, something no country can sustain in the long run - and despite a Spanish
public debt-to-GDP ratio of only about 70 percent. In the U.S., it is nearly
100 percent. Yet Washington easily borrows trillions - while investors immediately
panic just thinking about Spain; or Belgium, Italy, and most recently, France.
Even the warnings of the ratings
agencies leave investors unmoved. In August, the United States was stripped of [S&P's]
top AAA rating, which France and Austria have managed to retain. Nevertheless,
the U.S. enjoys low interest rates, while France and Austria pay almost double.
Posted
by WORLDMEETS.US
Why is the United States so favored?
The first reason is simple: If no private buyers can be found, the Federal
Reserve is prepared in an emergency to purchase unlimited amounts of U.S.
government bonds. The FED sees itself as the "lender of last resort."
This knowledge reassures investors immensely. They can rest easy that their
U.S. government securities are guaranteed. In times of financial uncertainty,
this security is worth real money - which is why investors are willing to
accept negative real interest rates.
How different things are in
Europe: The European Central Bank (ECB) is legally prohibited
from buying up unlimited amounts of government bonds. Although the bank has
acquired bonds well in excess of €190 billion, this is only meant as a
temporary measure. Thus, investors will continue to panic and demand high risk
premiums, because at any moment, a further haircut on Greek debt could be
announced.
The Americans have been
stunned that Europeans would abandon their strongest weapon. For months now,
U.S. President Barack Obama and his Treasury Secretary Timothy Geithner have
called on Europeans to unpack their "bazooka" - an anti-tank weapon
called the ECB. Advice on how the E.U. should once and for all copy the FED is
frequently dished out by the American Embassy in Berlin.
Merkel
as Dominatrix: German influence and the euro crisis is now
breeding resentment
in the rest of Europe, and is perhaps making
But monetary policy isn’t the
only thing that explains why the U.S. remains so popular among investors. Another
is that the U.S. could easily reduce its debt if only they chose to. All they
have to do is raise tax rates on its top income earners, which is why U.S.
billionaire Warren Buffet has repeatedly said that his average tax rate of 17
percent is ridiculous. Even the Congressional
Budget Office has determined that a single measure would be sufficient to
broadly restore the U.S. budget: Allow the tax cuts for the super-rich,
introduced under former President George W. Bush, to lapse.
And finally, there's a third
very banal reason investors flock to the U.S.: where else would they go?! You
can't park your money on Mars - and on Earth there is an "investment emergency."
Those reluctant to invest in dollars or euros are left with the pound, the yen
or Swiss francs. But these three currencies are too small to absorb the volume
of money that buzzes around the globe. That is why investors hope beyond hope
that Europeans finally learn from the U.S. and start firing that ECB
"Bazooka."
