The fact that Mario Draghi pointed out the limited efficacy of monetary stimulus in moribund economies in late 2014 has not stopped him becoming a chief peddler of monetary snake oil yet again, providing markets with at least the initial fillip they failed to get from the G20 and China before reality bit.
Unfortunately for all the printed money thrown about the latest stimulus package is likely to do absolutely nothing for the real citizens of Europe, who, faced with a balance sheet recession/depression are neither going to go gang-busters to take out new loans, nor rush to buy over-priced European equities, which is perhaps why the initial rally rapidly ran out of momentum and fizzled.
Of perhaps more real concern is that in an effort to appease capital markets he has ignored the pleas of Deutsche Bank and actually made real world banks life much, much harder.
So let’s look at some of the nonsense.
- ECB Deposit rate cut from -0.3%, to -0.4% to encourage banks to not keep hold of the cash that they need to hold, you know, so they can have stronger balance sheets
- Marginal lending rate dropped from 0.3% to 0.25% – Meh!
- Bank refinancing rates dropped from 0.05% to 0% – More Meh!
- QE to include investment grade non-financial Corporate Bonds….so none of the organisations desperate for cash then, like banks and struggling companies (just like sovereign QE hasn’t include poorer sovereigns, you know like Greece and Cyprus that really need lower rates)
- QE to be lifted from €60m a month to €80m a month, that will never filter through to the real economy
- More Targeted Long Term Refinancing Operations (TLRTOs)…to help provide additional bank financing for lending that nobody appears to want
Basically more of stuff that hasn’t really worked, apart from distorting financial markets ever more severely and making it harder for banks to make any kind of margin in a world that has gone from absurd zero rates to utterly deluded negative rates.
Overall these were “bigger” moves than the market had anticipated and as a result there was a sharp initial rally, until it appears common sense was restored and things subsided and then, well, lets look at the daily chart for the German DAX:
Source: AG Click/Tap to Enlarge
The truth is that a growing number of observers now accept the blindingly obvious, that monetary stimulus can only be efficacious in helping restart debt addled economies by supporting expansionary fiscal policy, as Draghi pointed out in 2014* .
The problem is markets don’t seem to have grasped that this only works once governments have accepted this fact, which was a major hope before the G20 and Chinese meetings which hence disappointed so much.
While we hate the fact that we have got to this desperate point through two decades of Central Bank guided stupidity we anticipate fiscal stimulus will come and come “large”, but like most of our (very small band) of peers who have thought this likely for a while we also appreciate the political will to take the necessary steps will only come as we fall, probably deeply, into another crisis. Until then the bulls will in all probability remain disappointed that their new shiny idea doesn’t immediately take life just because the obvious has finally appeared in their hopium addled minds. Stranger things have happened though as even the IMF started talking about this in 2014, so who knows?
* (Prometheus first pointed out the misdirection of QE in 2010 when it became obvious QE2 would cause a deflationary slowdown due to inflating a cost push inflationary asset bubble in commodities, crushing real consumer incomes globally…..and apart from China the worlds largest economies are?………..Yep you guessed it consumer economies…..except of course China which supplies/relies upon consumer economies until it too can transition to a consumer economy…..Oh and let’s not worry about what happens when everyone transitions to a consumer economy…Relying, we assume, on robots to make everything……only current capitalist models keep such efficiencies as robotisation only for the owners of the capital as the grwoing divide between the rich and, well everyone else proves….Meaning consumers relying upon robots will actually be penniless…Meaning robots will be redundant?…Civil unrest among robots?…Oh and owners of capital will be bankrupt…….Anyone else think we need to rethink some economic narratives? ….BTW this shouldn’t be news, Jimmy Goldsmith was talking about this back in the 80’s)