The financial fiber of the world economy got a jolt when Switzerland announced that they would no longer peg the Swiss franc to the Euro. They had been buying Euros to support the parity by printing Swiss francs. The volume of money involved forward into the future was a blank check and they didn’t like the concept. They already owned 480 billion Euros that they didn't even need. I have often stated that the Euro will die, only for one reason, the politicians cannot print Euros. Guess what, they are about to print Euros over someone’s dead body and it doesn’t look pretty. Gone is the Swiss backing of the Euro. Everyone wants to hold Swiss francs, but spend Euros. Bad money always chases good money out of circulation.
The low interest rates around the world are beginning to take a toll. Very low rates tend to accelerate the miss allocation of resources to nonproductive ends. Normally, interest rates play a big part in whether a project will get built or not. Very low interest rates force the flow of cash to investments that pay a higher return. So if the banks are paying 1 1/2 interest and the stock market returns 12% guess where money is going? The current chicken coming home to roost is oil exploration investments. Canadian tar sands which has the consistency of very thick molasses (after heating) can be pumped through a pipeline if someone thinks that it is a good buy at $100 a barrel. Whoever financed the tar sands project is probably standing at a freeway exit holding a cardboard sign saying, "Will work for food."
Some people are claiming that the economy is out of the woods now because there isn't the hint of a recession. I’d like to point out to them that a recession and a depression are two different animals. We are in a full blown depression and have been since 2006. A recession is an economic statistical calculation. In a depression, you have terms like Quantitative easing, high unemployment, ZIRP, high enrollment in government programs like food stamps, and extreme government waste (economic stimulation) trying to find solutions like Solyndra. We can't stop printing dollars and we don't dare let interest rates set their own level (if we expect to pay the interest on what we printed).
The real trouble right now is the trust of government, and I suggest that it is misplaced. Fanny and Freddie have resumed writing 3% down low interest, home loans. The house is way overpriced, but this will make it easier for minorities to purchase a home. Common sense suggests that if these homes were such good deals, there wouldn't be any left. Isn’t this what started the housing mess?
The government ZIRP (zero interest rate policy) stimulates borrowing and encourages people to take on more debt and consume product. Couple that with Quantitative Easing (printing money) and this is what the world is dealing with. We used to put money in the bank and talk about compound interest being the 8th wonder of the world. Now it’s all about consumption and seeing how many dollars you get back on your credit card purchases. You don't have to wait and save up to purchase what you want, you can have it now. Kind of makes you wonder, isn't this what bubbles are made of?????
Switzerland just tipped over the apple cart by saying “no” to printing more francs and the funny thing is that nobody is quite sure what will happen next. The sanctity of the Euro has been challenged by the oldest successful banking country in the world.
As a post note:
Step one: Foreign depositors face a 7 ½ percent tax on Swiss bank deposits
Step two: Swiss Franc unpegged from the Euro 1/15/2015
Step one: Foreign depositors now face a 2 percent tax on Danish bank deposits 1/19/2015
Step two: Hmmmm