Does the deployment of the European Central Bank's unlimited monetary firepower to save a single currency outweigh its potential impact on the rest of the world's economic infrastructure?
(1888PressRelease) October 11, 2012 - On September 6th, 2012, the Chairman of the European Central Bank, Mr. Mario Draghi, decided to use what some may call a military deployment to solve the financial crisis that is plaguing all European countries; including but not limited to Portugal, Italy, Spain, Greece and Ireland. Arguably the continent's super powers. The Chairman undertook a strategy to buy Euro Zone's short-term bonds in the secondary market via a program dubbed "Outright Monetary Transactions", or OMT. This is aimed at addressing targeted countries' "distortions in financial markets"?
According Dr. Mehenou Satu Amouzou, President of MSA Incorporated Investment Trade & Management, this so called "Bazooka Approach" to help stabilize the Euro Zone financial crisis has been used in the past. Most notably in the United States to stimulate the economy by bailing out banks that capitalized heavily on mortgage owners' predatory lending practices. This phenomenon is not unique to the U.S., banks similar occurrences surfaced in Europe; specifically Greece and Ireland. The important point to note here is, not only are these countries affected, but the spillover emanates to corrode surrounding countries as well. In this case other European Union countries are in the red zone. Where does the money used to buy these short-term bonds in the secondary market come from? What is going to be the cost or long-term expense for the European Central Bank and host countries? How long will the European Central Bank hold these bonds? What is the exit strategy?
According to Dr. Mehenou Amouzou most of the funding for these short term bonds will be financed by taxpayers. With a growing rate of unemployment in an already high unemployment country, how does one ask or dictate to a nation it must bear the burden of saving the Euro? Even if a nation agreed, in reality the only European nation that may be able to carry this weight is Germany. Who is now experiencing slow growth due to its investments in the U.S. Market place? World-wide, countries are challenged with management of deficits and growing deficiencies in their core industries.
Regarding Greece, the European Central bank and their affiliate institutions had more than 30 meetings with the principal task of finding solutions to similar problems now faced by Euro Zone nations; mainly growing unemployment rates, decrease in purchasing power and other indicators signaling inflation. What was the result? Did Greece's economic situation change? Is the European Central Bank's procedure adequate to solve this financial problem or is it just a temporary band aid before the "Economic Tsunami" arrives? We have to learn from the past, the USA stimulus package was more than 1.5 Trillions USD a major part of them went to the banks to help or to stabilize the mortgage industry for the people to save their homes but at the end more than 95 % have lost their homes. The point that Dr. Mehenou Amouzou is making is very simple. The way the world economic situation at this moment is like sitting on the death row waiting to die; it is just a matter of hour's days, months and maybe a few years. Let me provide further clarity.
Consider the country as a credit card holder with a billion dollar credit card limit. The country maximizes the credit on the card. Taxpayers are responsible for paying the monthly credit card bill. Taxpayers lose their jobs and are no longer able to pay the credit card bill. Country is in default because of taxpayer inability to service the country's debt. Who is the country in debt to? The country ultimately borrowed money to purchase the short-term notes, the inability to service the country's debt. Who is the country in debt to? The country ultimately borrowed money to purchase the short-term notes; the country is now in debt as a borrower to multinational banks and corporations. Because of this debt spiral now in default, the country's credit rating is rapidly depleting. The short-term bonds now have dissolving value and have no more exit buyers in the secondary market. Now, consider the buyers who purchase the short-term bonds before the "crash" they have 'toxic" assets on their books. World War III as I have previously stated seems imminent.
All developed countries and some developing countries' Governments, policies makers and major lending institutions are responsible for today's financial crisis; this responsibility is collective. According to Dr. Amouzou these countries have paid dues to this tarnishment at one time or another and still they allow this phenomenon to persist. Short-term supply shocks like this are historical disasters and the countries that adopt this policy are usually steps away from insolvency. Banks, funds and other lending institutions continue to offer funding for non-productive projects and expect the invisible hand of capitalism to provide market corrections (that is their lending premise) until the financial "Honeymoon" is over; society is left at the alter.
Printing new money to finance existing debt will be a complete failure, this strategy never works. The best recommendation or proposition for the European Central Bank is to take the lead and meet with the creditors; those who are also responsible of this financial crisis to negotiate and drastically reduce the outstanding debt of these countries through policy as Dr. Mehenou Amouzou has mentioned in his earlier article that "The World Honeymoon Is Over, Debt Crisis Continues To Wage War On Economic Policy".
An example of a policy driven solution calls for the lender to forgive 50% of the borrower country's current debt in exchange and conditioned upon drafting new policies to promote investing in more productive industries, creating jobs and committing to sustaining economic growth at a yearly average which falls between 3% and 5% annually with progressive growth of 0.5% to be added each year. It will help the economy by starting from scratch and building up. The Euro currency could be save by reforming the economy, the banking institutions and their policies, printing new money is never the solution its implemented to cover the past mistake, or mask policies which have no real value; they have not disappeared but these policies constitute slow economic growth that is not strong enough to counter the economic destruction wading to expose itself.
Creating government oversight organizations which are third party and non-partisan to oversee infrastructural investing and banking system to manage economic growth is good but not the best alternative; this is another band aid. We need economic, banking, and policy reform. These variables and industries are the core catalysts for our global financial failures; the system used in the past which continues to be used today is obsolete, inadequate and impracticable.
The United States Federal Reserve wants to join the European Central Bank buying euro zone countries short-term bonds in the secondary market, where are these monies going to come from? Maybe by printing it? Who is going to be responsible for these costs? There are bigger problems in the USA which require immediate attention whose consequences far outweigh the use of funds to buy European short term-bonds with an uncertain future.
According to Dr. Mehenou Amouzou in the USA, the total debt is above or close to $17 Trillion, to start to solve the debts problem in the USA we need to find what happened to create the debt? Only then can a solution to eradication for the debt be achieved. If this USA economic trend continues does the USA continue to maintain their economic or military superiority by mismanagement and increasing debts? In the next 10 years, several emerging countries will continue and maintain economic growth, building large cash reserves and alliances in a collaborative effort with other countries to seize the opportunity to oust the USA as a world power. It is happening right now this very day. It is very important to analyze the past; the former Soviet Union was an economic and military power at one time but its neglect and attentiveness or lack thereof to focus on economic growth in contrast to its military might caused it to dissipate. The former Soviet Union had more military complex industries than food processing industries and in the end the former Soviet Union was a military horse with all its power but could not feed its citizens.
The Major question to ask is; can the US continue to be the world military superpower in one area and manage its economic decline? Its debt continues to rise, the policy makers continue to print or borrow money to maintain its current status; the proverbial band-aid surfaces once again. The economic, banking and policy reform I have discussed is very important for the success of the country. The decision makers to date have failed to draft effective policy to control the country's downfall but it is never too late to address this corrosion. It is time to relieve our senior citizens from making the difficult decision between buying medicine to live versus buying food to live without either they, we will surely perish. We should all be able to enjoy life without worry.
Dr. Amouzou received his Master in Business, from the European Advanced Institute of Management, also a Certificate in Finance and Investment in Paris, France. He completed his Post Graduation work in Political Strategy, International Relation and Defense Strategies and earned his Ph.D. in International Finance.
Contribution to this article was made by Byron K. Belser. Mr. Belser assists Dr. Amouzou and holds a Master degree in Development Economics and a Juris Doctorate in Law.