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Even the European Central Bank Says the Crash Is Coming

June 4, 2014 (EIRNS)—The European Central Bank has now publicly acknowledged that the world is on the eve of a global financial collapse. But the bank is preparing to confront the threat by increasing the dose of the same deadly medicine: physical economic deflation and financial hyperinflation.

In its quarterly report, the ECB warns that the main risk to financial stability is an “abrupt reversal of the global search for yield, amid pockets of illiquidity and likely asset price misalignments.” Translated from bankers-speak, this means that the ECB fears an abrupt reversal of capital flows in the Eurozone, and a bursting of the asset prices bubble.

“In Europe, the preference for riskier assets has been evident in the compression of credit spreads in sovereign and corporate bond markets, but also in valuations of other assets such as equities and the prime segment of commercial property (i.e., modern office and retail space in capital cities).”

In recent months, hot money has fled into the Eurozone out of so-called emerging markets, inflating the bubble of both sovereign as well as corporate bonds and stocks. As the trans-Atlantic real economy goes deeper and deeper into a deflationary spiral, the devastating explosion of the bubble comes closer.

The ECB has prepared public opinion to expect a new massive injection of liquidity, the so-called monetary “bazooka,” which combines lower rates, long-term loans to banks, asset purchases, and negative deposit rates at the ECB. One or all of such measures should be announced at the next ECB board meeting on June 5.

The ECB used to justify brutal austerity by insisting that its mandate was to ensure “monetary stability” by keeping inflation low. But on May 26, Mario Draghi announced in Portugal that the ECB’s main objective now is to create inflation.

He said that the enemy is now a “pernicious negative spiral” of low inflation and weak lending risks, and if the situation worsens, the ECB might even start to buy bonds outright.

“At the other end of the spectrum would be a too prolonged downward departure of inflation and/or inflation expectations from our projected baseline scenario... This would call for a more expansionary stance, which would be the context for a broad-based asset purchase programme.”

As part of the “bazooka,” the ECB has issued a joint paper with the Bank of England, which calls for relaxing the rules on asset-backed securities, so as to allow banks to issue tons of worthless paper that the ECB will then buy. “Greater issuance of low credit risk ABS may also deepen the supply of high-quality collateral,” states the discussion paper issued by the staffs of former Goldman Sachs boys Mario Draghi and Mark Carney.