Tighten That Belt!

Over the last four years, the European Central Bank has managed to inject  €2.6 trillion into the banking system in order to maintain economic stability.

To be clear, these cash injections have been one of the only things propping up the economy, and even the Governor of the ECB has now admitted that

Now, €2.6 trillion may not sound like a lot of money but we need to consider that this money is then multiplied by the fractional reserve banking system with each Euro created then being lent out multiple times. So the actual amount of money that went into the system is much higher.

Here we can see the level of M3 money in the Eurozone going from less than €10 quadrillion to more than €12.27 quadrillion in just four years.

Yesterday, the ECB announced that they will stop injecting new money into the system. In the United States, they are already starting to extract money by allowing the bonds they'd purchased to lapse. In Europe, they'll be renewing their bonds for now.

So, for those of you reading these daily updates and wondering what monetary tightening is, this is how it works and it is having a massive impact on the markets.

Traditional Markets

Stocks declined during the New York session yesterday. There were a bunch of headlines about a possible government shutdown but that's probably not the catalyst for falling stocks. Just a sideshow distraction.

As we mentioned above tightening monetary policy is the driver here. During most of the year, stock bulls were able to say that the economy is still doing very well, but unfortunately, they don't even have that leg to stand on anymore.

The US jobs report last week was dismal and the GDP in Q3 was a clip below the national average.

Things didn't get much better in the Asian session either. Chinese investors drank their morning coffee reading headlines like this...

To put the numbers into perspective, here is a graph of China's industrial production since the crisis.

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Please note: All data, figures & graphs are valid as of December 24th. All trading carries risk. Only risk capital you can afford to lose.

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