by Justin Spittler, Casey Research:
The European Central Bank (ECB) just doubled down on easy money.
In March 2015, the ECB began its quantitative easing (QE) program. This is when a central bank creates money out of thin air and injects it into the financial system. It’s really just another word for money printing.
The ECB thought printing money would stimulate Europe’s economy. But it hasn’t worked. Europe’s economy is growing at its slowest pace in decades. In many European countries, unemployment is in the double digits and climbing.
At this point, you would think the ECB would give up on QE. But Mario Draghi, who runs the ECB, just said he’s going to keep the printing press running for longer than he originally planned.
Bloomberg Markets reported yesterday:
“The presence of the ECB on markets will be there for a long time,” the institution’s president said in Frankfurt after the Governing Council agreed to add more than half a trillion euros to its bond-buying program and extend it until at least the end of 2017. Quantitative easing is “in a sense open-ended, it’s state-contingent,” he said.
According to Draghi, easy money is the only thing holding Europe’s economy together. Bloomberg Markets continued:
Draghi cited weak underlying price pressures, political uncertainties and inadequate government reforms as he laid out the reasons for expanding the ECB’s asset-purchase plan to at least 2.3 trillion euros ($2.4 trillion). He and his colleagues have frequently stressed that the euro area’s economic upturn is largely reliant on continued monetary easing as governments fail to play their part.
Doubling down on the same failed policies obviously won’t fix Europe’s economy.
• The euro, the official currency of the European Union, plunged 1.3% yesterday…
It was the currency’s worst day since Brexit. The euro has now fallen 8% against the U.S. dollar since May.
This might not sound like a big move. But keep in mind, we’re talking about the currency of the world’s largest economy, not some penny stock.
We think the euro could keep falling, too…
You see, printing money doesn’t actually grow an economy. All it does is create more paper money chasing the same number of goods and services. The average Joe ends up having to spend more money on groceries, clothing, and gas.
But Draghi’s announcement isn’t the only reason why the euro is in trouble…
• The Federal Reserve is doing the opposite of the ECB right now…
It stopped printing money more than two years ago.
More importantly, basically everyone expects the Fed to raise its key interest rate next week. And it could hike rates as much as four times next year, now that Trump’s going to be president.
If the Fed raises its key rate, U.S. bonds and other assets will pay higher rates, too. This should make the U.S. more attractive to foreign investors, which is bullish for the U.S. dollar.
And if the U.S. dollar gets stronger, the euro will get weaker. After all, a currency’s “value” really just measures how many units of another currency it can buy.
• Nick Giambruno, editor of Crisis Investing, thinks the euro will plunge in the coming months…
That’s because Italy, one of the EU’s most important economies, could soon abandon the euro. If this happens, Nick says the entire EU experiment could fall apart.
He explained why in the August issue of Crisis Investing:
Italy will likely return to the lira.
If Italy—the third-largest member of the eurozone—leaves, it will have the psychological effect of someone yelling “Fire!” in a crowded theater. Other countries will quickly head for the exit, and return to their national currencies.
Economic ties and integration are what hold the EU together. Think of the currency as the economic glue. Without the euro, economic ties will weaken, and the whole project could unravel.
This would obviously be bad for everyday Europeans. But savvy investors could stand to make a fortune by getting ahead of this coming crisis.
• In August, Nick encouraged his readers to short the euro…
Shorting is when you bet that an asset will fall in value. If you’re right, you make money.
Now, most people think only “sophisticated” investors short stocks and currencies. But Nick found a way to short the euro that’s as easy as buying a share of Wal-Mart (WMT).
Nick’s euro short has returned 3.8% since the ECB’s meeting yesterday. His readers are now up 15% on this trade in just four months. But they could see much bigger gains in the coming months.
• Europe is beginning to unravel…
As we all know, Great Britain voted to leave the EU on June 23. The historic decision rattled markets from Tokyo to New York, knocking more than $3 trillion from the global stock market in just two days.
At the time, most people thought things would quickly go back to normal. But as we explained on June 27, Brexit was merely “a taste of what’s to come.”
The Brexit has paved the way for other countries to leave the EU…
Shortly after news of the Brexit broke, France’s National Front leader Marine Le Pen wrote: “Victory for freedom. As I’ve been saying for years, we must now have the same referendum in France and other EU countries.”
Ms. Le Pen is the front-runner to become the president of France next year. Two weeks ago, she said “France has possibly 1,000 more reasons to want to leave the EU than the English.”
Politicians in Italy and the Netherlands are also demanding “the right to choose” to leave the EU.
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