Draghi Promises Hyperinflation, Sets Up Potential for Financial Chaos Late Next Week
July 27, 2012 • 9:38AM

European Central Bank head Mario Draghi announced a policy of resuming the mass printing of euros, in a speech to a European Parliament committee on July 26. Draghi promised to start buying Eurozone countries' bonds en masse again, appearing to reverse his own policy statement of only three weeks ago after the ECB's last meeting. The reversal was provoked by spreading panic among European financial markets as the interest rate on Spain's 10-year bonds had been starting to approach 8%, with Italy's following.

Draghi's announcement of another hyperinflationary attempt came with bluster: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he said, undoubtedly realizing that any sensible audience would not believe him. The ECB's balance sheet is already $4 trillion, larger than that of the Federal Reserve, and that has only slowed the banking collapse. It bought 50 billion euros in Greek sovereign debt, to little effect on that crisis.

Now, by promising hyperinflation, Draghi sent the stock markets into a day's euphoria, and Spain's 10-year rate briefly sank down to about 7% again. But Draghi has put those same markets on the line when the ECB meets Aug. 2, with German board members likely strongly opposed. If it does not deliver a big sovereign-bond buying binge, "financial markets would likely be thrown back into chaos," warned the Wall Street Journal. "By using strong words, he is inviting creativity and fantasy in financial markets on what they can put on their wish list" for ECB action, said Carsten Brzeski, economist at ING Bank, to the Journal. If disappointed next Thursday, "markets might go wild."

"Super Mario" concocted a super-slick reinterpretation of the ECB's mandate to cover his panicked reversal. He decided the Bank could buy sovereign bonds to narrow interest-rate spreads among countries and thus improve the Bank's "channels for monetary transmission." "To the extent that the size of the sovereign premia [inter-country spreads] hamper the functioning of the monetary policy transmission channels, they come within our mandate", he told the EP commmittee.

On the same day, Austrian central bank head Ewald Nowotny re-floated the ultimate super-inflationary (Geithner) idea of the "leveraged ESM", in which the ESM bailout fund is given a banking license and proceeds to borrow trillions from the ECB and the Fed, making it a $5 trillion "bailout bazooka".