What Draghi’s Statement “The ECB is Ready to do Whatever it Takes to Preserve the Euro” Means

I pointed out that ECB President Mario Draghi delivered a magical statement last week which sent markets soaring (I think much had to do with the covering of short sales).

For Professor Gary North such statement has the following implications…

What he said was in fact a cry of desperation. He does not know what to do, other than to inflate. He knows he must break the Maastricht treaty that created the EU, but he does not have any choice. He has defined out of existence the treaty's limits on the ECB. He defines his mandate broadly. He knows that Spain is close to default. The ECB must buy Spain's bonds, or else provide funds for some other agencies to buy Spain's bonds. The weekend summit meeting less than a month ago has already broken down. Spain's ten-year bond rate went above the failsafe 7% figure.

The European banking system is being propped up by monetary inflation. There are signs that this cannot go on much longer, but the central bankers have enormous self-confidence. They believe that fiat money can delay any major crisis. They believe that fiat money is the ultimate ace in the hole. So do Keynesians. So do politicians. They really do believe that the exclusive government monopoly authority to supervise the creation of digits is the basis of prosperity.

Investors invest digits called money. They are convinced that the ability of central banks to create digits has created a failsafe for investors' digits. They believe that a prudent mixture of digit-generating investments will gain them a positive rate of return, as measured in digits, just so long as the total number of digits is always increasing. This is the key to every investment strategy that is tied to "digits invested now, more digits to invest later": an ever-increasing supply of digits.

You might think that investors would judge their success in investing by increased real income: stuff, not digits. But the vast majority of investors assume that stuff will inevitably take care of itself, if only the supply of digits is increasing. Here is the mantra of this generation: "The system of stuff production depends on a steady increase in the supply of digits."

This is why there is no resistance to central bank monetization. On the contrary, there is cheering. The journalists follow the economists. The economists have adopted the mantra of digits with the zealous commitment of any priesthood. Milton Friedman is their high priest.

Professor North sees depression or another crisis ahead, but this will either be through hyperinflation or through mass defaults. He thinks that defaults will be the most likely outcome because the incentives guiding the career of central bankers have been tied with large banks.

I think that the both scenario has a level 50-50 odds, as central bankers will most likely underestimate the impact of their actions.

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