This morning the European Central Bank tried something different. As Bloomberg
reported:
The European Central Bank cut its deposit rate below zero and said it would
announce further measures later today as policy makers try to counter the prospect
of deflation in the world's second-largest economy.
ECB President Mario Draghi reduced the deposit rate to minus 0.10 percent
from zero, making the institution the world's first major central bank to
use a negative rate. Policy makers also lowered the benchmark rate to 0.15
percent from 0.25 percent.
The promise of further measures today "has stoked up hopes that the ECB
is going to unleash a huge bazooka on the market in the press conference," said
Philip Shaw, chief economist at Investec Securities Ltd. in London. While
he thinks that quantitative easing is "very unlikely" now, "it may well be
that what the ECB just said is stoking up hopes that QE could be on the cards
after all. "
Later in the day, Draghi fleshed out his thoughts in the aforementioned press
conference. From Business Insider:
In his introductory statement, Mario Draghi unveiled targeted longer term refinancing
operations (TLTROs). The initial size of TLTROs is about €400 billion
and all TLTROs will mature in September 2018, or in about 4 years. Two successive
TLTROS will be conducted in September and December 2014. "From March 2015 to
June 2016 all counter parties will be able to borrow quarterly up to three
times the amount of their net lending to the euro area non-financial private
sector, excluding loans to households," said Draghi.
The ECB is "intensifying preparatory work for outright purchases in the
ABS [asset backed securities] market." It will also suspend its weekly securities
market program (SMP) sterilization.
The Q&A has begun. Here are the key highlights:
-
There will be additional reporting requirement to ensure lending goes
to real economy. For all practical purposes the ECB has reached the lower
bound of rate policy, Draghi says.
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"The main reason to commit to sterilization by my predecessor first and
by myself later was based on the effects that this additional liquidity
might have on inflation," says Draghi. "This decision takes place in a
background characterized by low inflation, weak recovery and weak monetary
and credit dynamics, that's the reason for suspending this commitment."
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"Being able to have unanimity on such a complex set of instruments means
a very very extraordinary degree of consensus," says Draghi. "What is in
this TLTRO that makes it different? The cost obviously, it is very low,
the term maturity is four years, and the termination that this money not
be spent on sovereigns and on sectors that are already experienced or have
just come out of a bubbly situation, that's what in it."
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We don't see deflation says Draghi.
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"There is a deep misunderstanding here. The rates we've changed are for
the banks, not for the people," says Draghi. It's wrong to think we want
to "expropriate savers. ...The concerns of savers should be taken very
seriously." Draghi however adds that the decision to lower rates for households
is the decision of banks, not the ECB.
Some thoughts
Anyone who finds this surprising hasn't been watching Europe's inflation numbers.
As most of the eurozone including, recently, Germany slipped towards deflation,
it was clear that the European Central Bank would have to launch a new currency
war offensive, and soon. So here it is: negative interest rates on bank excess
reserves (though not yet on consumer bank accounts) along with direct infusions
of cash into the banking system.
This will have a modest effect on bank lending and economic activity, but
it won't stop the eurozone's downward spiral because liquidity doesn't fix
insolvency. In other words, if the system's collateral isn't as valuable as
the debt it supports, then the system is in trouble. And coercing banks into
making more loans against inadequate collateral will not help the situation.
So the next, equally inevitable stage in Europe's offensive will be some form
of QE, and apparently the ECB has decided that asset backed bonds will be the
instrument of choice. The idea is that by buying, say, mortgage backed bonds
with newly-created euros, the ECB will be able to direct those euros back into
the housing market, which will in turn get people spending again. This, by
the way, is the script the US followed in the first half of the 2000s which
produced the housing bubble and the subsequent crash.
But before this bubble bursts, the euro will fall due to rising supply, which
is the same thing as saying that the dollar will soar. This will be deflationary
for the US, producing a string of "unexpected" misses in corporate earnings,
GDP and inflation, and will leave Washington with no choice but to respond
with renewed debt monetization and money printing and in all probability negative
interest rates of its own. And so it will go, until we figure out that depreciating
fiat currencies against each other is a zero-sum game that makes the rich richer
and everyone else much poorer.
One would expect gold to be the main beneficiary of crazy policies like negative
interest rates, and it did pop on Draghi's news. But the ongoing manipulation
of precious metals prices makes this far less of a sure thing than theory and
common sense would imply. Fundamentals always win in the end, but in a world
of manipulated markets the timing is completely unknowable.
Previous articles in this series are here
