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Hi murmur, my thoughts:
What are the the implications for the US economy and the US financial system, for the global monetary system? What we can see through these development?
Some recent development and a few points to note:
1. the Wall Street banks will lose a lot of businesses from the Eurozone, thus help to squeeze the revenue and profits of these Wall Street and City of London banks;
2. the banking and financial sector in the Eurozone economy is far smaller and less important than in the US and UK.
3. The US FED, through their QEs, are efforts to save the banks at the cost of harming the country and the taxpayers; The lates move by the Eurozone is doing exactly the opposite: sacrificing the banks but aim to help the sovereigns with their finances, with ECB taking a neutral position, a true testimony of central bank independence.
Following the ban on naked short selling of bank stocks, recently the Eurozone authorities also have put in a ban on naked CDS instruments, that is, unless you are hedging a bona fide credit position, you will be banned from initiating and holding Credit Default Swap Contracts. (CDS).
It has become patently clear in the past few years that these derivatives, especially naked CDS instruments, are products designed by Wall Street banks for the benefit of the banks themselves, not the real economy. The shrinking of the European banking sector will be a process through which the Eurozone banks are finally parting ways with the US/UK banking sector. The Eurozone banking industry will go back to basics, back to traditional plain vanila banking model, leaving the US/UK banks to play the artificial derivatives game, largely detrimental to the real economy. By shedding their US dollar denominated assets, the Eurozone banks will also become less entangled with the US debt and currency crisis.
What the Europeans have done are in stark contrast with what the US has been doing on the policy front. One example is the ongoing saga of CFTC dithering regarding position limits on commodity futures. The US FED and Treasury are losing control.
This is very important, because the US dollar based international monetary system, the US dollar global hegemony needs support from other players, especially support from the Eurozone monetary authorities. The latest develompent is just another blow to the US dollar system which is sliding down a death spiral. The Europeans are preparing themselves for that eventuality.
Your comment?
We have also seen FED officials started making noises about the neccesity of significant QE3.
The purpose of these QEs, ostensibly, is to help the economy, but this is really a red herring. The main purpose of QE is to help the banks, to prevent the banks from Lehman like collapses. Operationally, QEs are aimed at lowering the interest rates so as to lower the funding cost of the US treasury. With US public debt at USD$15.01 trillion and growing, the US can not afford to let interest rates rise, for that will crash the US government finance.
We know the outstanding amount of financial derivatives is over USD$600 trillion, and over 80% of these are interest rate related derivatives. The US interest rates have been declining since the Paul Vocker years (1970s), and interest rate derivatives started explosive growth in the mid 90s when Robert Rubin was the treasury secretary*. The effect of these interest rate derivatives has been the continued supression of US government bond yield.
Raising interest rates? the consequence will be unbearable to the system. And as the japanese experience has shown, once a central bank monetary policy gets to ZIRP (zero interest rate policy), there is basically no way out. The US Federal Reserve is pretty much trapped.
The grand experiment of easy money policies over the past few decades will end, and end very badly.
*Reference: Gold and Interest Rates: More than Joined at the Hip, Ron Kirby: http://news.goldseek.com/GoldSeek/1314194400.php