It looks as if Federal Reserve Chairman Ben Bernanke has got himself a wingman in the form of European Central Bank President Mario Draghi.
Bernanke earned the nickname ‘Helicopter Ben’ after giving a speech in November 2002 in which he commented that “helicopter drops” could be used to put money into the economy in order to fight deflation. As I have mentioned before, Bernanke is haunted by the deflation of the early 1930s, and believes that it was the Federal Reserve that caused the horrific suffering, deprivation and dislocation America and the world experienced in its wake.
In 2008, in response to the global financial crisis that began in the US mortgage market, Bernanke lived up to his nickname by printing trillions of dollars in order to bailout insolvent banks and other financial institutions. He also slashed the federal funds rate from over 5% in 2007 to 0.25% in December of 2008, where it has stayed ever since.
It now appears that Bernanke has been joined in his deflation fighting role by ECB President Mario Draghi. Since taking over from Jean Claude Trichet on 1 November 2011, Draghi has cut the ECB’s benchmark interest rate from 1.5% to 1%, and further cuts are sure to follow given the deteriorating economic outlook:
Unemployment remains at a 13-year high of 10.3%, while confidence in the economic outlook has fallen to the lowest in more than two years. Services and manufacturing output also contracted for a fourth month in December.
Since 1 November, Draghi has also authorised the ECB to buy more bonds from insolvent Eurozone nations such as Italy and Spain, inflating the ECB’s balance sheet by 17%. At the end of last year the central bank’s balance sheet hit a record €2.73 trillion.
Draghi has also loaned 523 European banks €489 billion for three years, an unprecedented amount and period, and weakened the collateral criteria it imposes when lending to banks.
More work to do
Draghi has made excellent progress in getting his wings but he has more work to do if he is to fly solo. In the words of the chief economist at Berenberg Bank in London, Holger Schmieding, “Either the ECB acts boldly enough to get the Eurozone confidence crisis under control, allowing global growth to regain momentum, or the crisis spirals out of control, pushing the world into a severe recession.”
What does this mean for investors?
It means the race to the bottom for paper currencies is likely to hot up over the next 12 to 18 months – something which is bullish for hard assets especially gold which has just completed its 11th consecutive year of gains.
We can expect the Euro to sink to new depths against the US dollar, but what this race hides, is the fact that the dollar too is losing purchasing power, as are all fiat currencies.