Yesterday, all of the major stock indexes around the world surged higher after the central banks announced the coordinated intervention for the banks holding European debt. The action by the central banks was the exact same action that was taken in September 2008. We all know what happened shortly after that intervention in 2008 as the stock markets cratered into March 2009. This time around the central bankers will probably be a bit smarter and the current scenario will not be as dire so soon. In other words, the liquidity pump will be kept on turbo mode. The problems will seem a little better than they really are.
Recently, the European Central Bank (ECB) had a changing of the guard. The former President of the ECB Jean-Claude Trichet has been replaced by Mario Draghi. Now it is important to note that Draghi was the vice chairman and managing director of Goldman Sachs International. This guy lowered the key interest rates in the European Union on his second day in power by 50 basis points. In other words, Draghi is ready to inflate the markets at all costs. Italy, France, and the United States have all had talks of making the ECB more like the Federal Reserve. You see, the Federal Reserve can print all the money they want. Just look at the recent reports and you will see that they have bailed out the banks to the tune of over $7 trillion. At this time, the ECB cannot print money to bail out the banks and this is exactly what is going to change very soon. Soon the ECB will be just like the Federal Reserve and they will begin to print money and simply monetize the debt.
Everyone knows that when you monetize the debt it causes inflation. This is what is coming down the road. This plan will take some time to implement, however, it won’t take that long. The institutions know this and will simply play the inflation game the same way they have in the past. Inflation is coming, and it will come in a big way. Traders and investors should continue to be cautious as these stock markets are likely to be extremely volatile over the next year while these central banks get there plans in order.