Thursday, March 5, 2009

How low can it go before we get to Armageddon?

In an even greater sign of desperation, the two major central banks in Europe cut interest rates to historic lows. The Bank of England, serving the UK, cut its overnight rate to 0.5%, the lowest interest rate ever in the country, and announced it would print £75 billion of "new money" (or what they call "qualitative easing", whatever the hell that means!) -- while the European Central Bank cut the base rate in Euroland to 1.5%, the lowest since the creation of the Euro ten years ago, and pretty much announced similar measures to float money.

It's not they're really making new money -- that would severely devalue the currencies. Rather, it will be as has been in the case in the States an electronic swap of good money for the commercial banks' bad loans. But eventually, the interest rate is going to hit zero -- which means banks will loan money to each other for free. They don't like loaning money to each other even in the best of times. And car loans are still at 10%? Is something wrong here, people?

Most developed countries, including Canada, only print new money under the most extraordinary of circumstances and it is well known to be a risky strategy. Let it get out of hand -- well, we saw what happened in Zimbabwe, turning from the richest country in Africa to the poorest in just one generation.

Who knows where this might lead. Then again, everyone thought "the smartest guys in the room" were at Enron. I hope the central bankers are a lot smarter than that -- they are now collectively Atlas with the weight of the entire planet on their shoulders and the rate things are going we're going to have Armageddon without a single shot being fired in the infamous Israeli town.

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