Last week the European Central Bank (ECB) and the national central banks of the euro area started a massive purchase of government bonds. This way, sixty billion euros are to be pumped into the financial system until September 2016, a total of 1.1 trillion euros.
The ECB thus follows the example of the US Federal Reserve, which in three successive rounds of quantitative easing has pumped $ 4.5 trillion into the US monetary system and also that of theJapanese central bank, which has increased the country’s money supply by approximately 600 %since 2008.
According to the ECB, the measure is intended to boost the euro zone’s stagnant economy bycreating liquidity, as well as combat deflationary tendencies and bring about an inflation rate of around 2 %.
However, this argument is not very convincing, because neither in the United States nor in Japan has the printing of massive amounts of money (which is what the purchase of government bonds boils down to) led to any success. Both economies have continued to stagnate, with deflation and inflation more or less neutralizing each other.
Why then does the ECB resort to such a measure? The answer is quite simple: Faced with the impending collapse of the system, the ECB is left with no other choice.
The countries of the euro zone are currently indebted by 9.6 trillion euros or 94 % of gross domestic product, bank debtwithin the euro zone amounts to 20 trillion euros, not even considering the derivative market,which by far exceeds that of the official banking sector.
This massive amount of debt needs to be continually serviced, so governments and banks are in desperate need of fresh money, which they are now being provided with by the ECB.
How will this money be put to work? The governments will utilize it to service their debt, i.e. they will pay off interest and compound interest. The basic amount of debt, however, cannot be reduced because debt repayment would require economic growth and rising tax revenues. Thus,the basic problem of growing government debt will continue to persist despite ongoing payments.
The banks, too, will utilize part of the money to pay off interest and compound interest. Another part will be used for their „recapitalization“, i.e. for increasing the banks’ equity base (which in many cases accounts for less than 3 % of the sums they operate with).
Most of the money, however, will never be turned into loans and injected into the economy on order to further growth, as promised by politicians, but will go into speculation in the financial markets because that is where high profits and quick returns are waiting.
All this will contribute to the forming of even bigger bubbles in the stock and the real estatemarket and thus increase the risk of an implosion of the system. In other words: By purchasing state bonds, the ECB is actively contributing to the very mechanism that led to the crash of the global financial system in 2007 / 2008.
Actually, it is even accelerating it, because the sums involved are much higher now than they were then, bringing the world closer to the edge of the cliff.
Still, one must concede that the ECB is only acting in accordance with the logic of capitalism, because the global financial system has turned into an uncontrollable entity, which, for the sake of pure survival, calls for a steady input of ever increasing amounts of money.
The causes of this derailment are rooted in the politics of neoliberalism, begun in the 1970s, intensified by US president Ronald Reagan and British Prime Minister Margaret Thatcher in the 1980s, and promoted with even fiercer determination by their successors.
The liberalization and deregulation of financial markets, the removal of almost all legal restrictions they were once subjected to (such as the abolition of the Glass-Steagall Act in the US), have enabled the financial industry, which used to serve the real economy by lending, to develop a fully independent life of its own.
Starting in the 1990s, the market of its financial products, called derivatives, has all but exploded. According to the Bank for International Settlements it accounted for a sum total of $ 95 billion in 2000, growing to $ 601 billion in 2010.
Presently it is estimated at ten times global GDP (which is around $ 72 trillion). Its products are called swaps, futures and options. They all fall into the category of OTC’s (over the counter products) whose outstanding characteristic is that they do not appear on the balance sheets of any bank.
Basically the derivative markets function like a big gambling casino. Participants can place bets on rising or falling share prices, on currency fluctuations or on the possible default of companies or even states and thus quickly make huge profits or huge losses.
The most important feature is that trading in the derivative markets is extremely fast and does not take much more than pressing a few buttons on a computer. The higher the pressure on a financial manager the greater the likelihood that he or she will put their money in the derivatives sector rather than pass it on to the real economy where the realization of profits usually takes much longer.
After the crisis of 2007/2008 this market, which in spite of its vital role for the global financial system rarely finds mention the mainstream media, attracted the public’s attention for a while. Dragged into the limelight, politicians and central bankers swore again and again that it needed to be regulated and made manageable.
However, no action followed. Basically, this was to be expected, because this market cannot and will never be regulated.
The reason once again is simple: If one or even several governments seriously intended to limit the use of derivatives, international capital streams would immediately flow into those countries that would either not submit them to any restrictions or even take advantage of the situation by offering them special deals.
In other words, as long as there are nation-states that have different fiscal regulations or laws, there is no way to contain the derivative markets.
However, the bitter truth is that without a containment of the derivate markets there will be no recovery of the real economy. By having allowed the derivative sector to reach its present size, capitalism has created a parasite, which it cannot get rid of and which, by constantly depriving the real economy of capital, is slowly choking it to death.
Until its final hour, however, politicians and bankers will continue doing what they have been doing so far and what they are once again doing now by injecting 1.1 trillion euros into the euro zone: Prop up the system at any costs and by all means.
According to the Bank for International Settlements, there are currently $ 26.45 trillion in currency derivatives that are directly related to the value of the euro. In comparison, 1.1 trillion euros, which will now be given to financial institutions and large investors, seem like an almost modest sum.
For the majority of working people in Europe, however, who have been forced to contribute to the stabilization of the system by subjecting themselves to fierce austerity measures, the move of the ECB must come as a slap in the face.
While their standard of living has been reduced by higher taxes, lower wages and cuts in pensions and benefits, driving many of them into poverty and social desperation, they now have to stand and watch as 1.1 trillion euros change hands – not in order to ease their suffering or to be used for the construction of schools, kindergartens, hospitals and nursing homes, but for the sole purpose of maintaining a system of which everyone around the globe knows that its days are numbere
Mr. Ernst Wolff is one of the frequent contributors for The 4th Media. Mr. Wolff is a freelance journalist and author of the book “Pillaging the World. The History and Politics of the IMF”, published by Tectum-Verlag, Germany.