The Addict Is Resistant To The Drug

Have you ever wondered how the hard core drinker can pound back a six pack of beers and not seem the least bit intoxicated? In the meantime, your tea toddling aunt gets silly after half a glass of wine?

It’s because the addict becomes resistant to the drug.

On today’s show we are talking about the latest mainline injection of hard core drugs into the economy. I’m not talking about actual drugs of course.

The drug in this case is cash. The European Central bank announced its most aggressive stimulus package in a while: interest rate cuts, money printing, quantitative easing, the whole nine yards.

It’s pretty amazing when you think about it: interest rates in Europe are already NEGATIVE. They’ve been cutting rates for years, and it hasn’t worked.

Back in July 2008, the European Central Bank’s main interest rate was 3.25%.

By the end of 2008, it was clear the global economy was slowing down, and the central bank had slashed interest rates to just 1%. But they kept going. By 2013, the ECB had reduced its primary interest rate all the way to zero. And in 2014, they took the unprecedented step of cutting rates even further into negative territory.

European rates have been negative now for FIVE YEARS. Yet Europe’s economies are still a mess. These results completely defy prevailing economic wisdom. According to the playbook that nearly all central bankers use, cutting interest rates is supposed to stimulate economic growth.

It’s not working. Why? Because another six pack of beers won’t work for the addict. Another trillion Euros won’t work either.

So if it’s not going to work, why would they do it? After all, these economists have a lot of university degrees. They’re pretty smart men and women. If I can see it, then surely they can see it.

So why? It doesn’t make any sense. Or does it?

What if the lower interest rates made the Euro even less attractive to bond investors than it is today. We could see a flight of capital from the Euro to the US dollar, or to Japanese Yen. That would cause the price of the Euro to fall against the US dollar. When that happens, the exports from Europe all of a sudden look like a better deal. They’re less expensive and all of a sudden Europe looks a lot more competitive.

A fall in the price of the Euro would definitely have a stimulative effect on the European economy. Those Mercedes, Fiats, BMW and Porche’s will be more attractively priced than ever before. Vacationing in Europe would be less expensive. Perhaps planeloads of Americans will line the cafes in the south of France.

Here’s the scary part.

The US is going to feel like they need to respond to this silly financial arms race. You can bet that with an election looming in Washington, there will be tremendous pressure to stimulate the American economy. After all, this White House ran on a platform of economic boom, and to a large extent they’ve managed to ride the wave of economic expansion and declare victory. But if that economic success story shows signs of weakness, and by the way it is showing signs of weakness, you can bet that the printing presses in Washington will be warming up for the biggest stimulus package we’ve ever seen.

The President is already pushing the Fed to lower interest rates and to weaken the US dollar.

We live in a funny world right now. It’s a place where good is bad, and bad is good. Where weak is strong and strong is weak.

You can bet that if the natural market forces don’t work, then that new Mercedes will probably come with a tariff in addition to the alloy wheels and a sun roof.