As Long As It Takes
The ECB cut rates today and issued a 5-Point Press Release Statement emphasis mine.
(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively.
(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
(3) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy.
(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.
In the Press Conference Introductory Statement the ECB commented on the “continued shortfall of inflation with respect to our aim”, noting that “incoming information indicates a more protracted weakness of the euro area economy and muted inflationary pressures.”
“The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets,” said Mario Draghi.
Danish Central Bank Cuts to -0.75%
“Naive Boneheads”
Yesterday, Trump called Jerome Powell and the Fed “Naive Boneheads“
Trump Howls Politely Today
In a Tweet today, Trump was unusually polite.
Trump complained about the strong dollar, Euro depreciation, and Europe getting paid to borrow money.
Counterproductive Policy
A few days ago, Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.
I discussed Dor’s article in Questioning Lagarde as Gross Interest Income in Germany Heads Towards Zero
Email from Lacy Hunt
Shortly after posting Dor’s take, Lacy Hunt at Hoisington Management, pinged me with these comments.
“Dor’s article is outstanding. This is consistent with the great theoretical economics of the late Stanford economist Ronald McKinnon who argued that even before interest rates fall below zero, the counterproductive feedback loops outweigh the benefits of the lower rates even if the interest rates are lower in real as well as nominal terms. If you are not familiar with McKinnon’s economics, I strongly urge you to do so.”
Ronald McKinnon
On October 6, 2014, the LA Times reported Ronald McKinnon Dies at 79; Economist Opposed Fed Asset Purchases
Ronald McKinnon, a retired professor of economics at Stanford University who warned Federal Reserve policy makers including former Chairman Ben Bernanke that its large-scale asset purchases would harm the economy, has died. He was 79.
McKinnon specialized in international trade and finance, economic development and monetary theory and policy during his five decades at Stanford. The author of numerous academic papers, he also wrote eight books, including “The Unloved Dollar Standard: From Bretton Woods to the Rise of China” (2013). In addition, he worked as a consultant to central banks, the World Bank and the International Monetary Fund.
In the early 1970s, McKinnon helped introduce the concept of financial repression, the idea that government intervention in credit markets impedes economic growth.
In 2010 McKinnon was one of 23 economists and investors who wrote an open letter to Bernanke, then the Fed’s chairman, calling for him to end the central bank’s quantitative easing program of buying bonds to keep interest rates low.
“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy,” the letter said.
In addition to his scholarly work, McKinnon wrote opinion pieces for the Wall Street Journal, the Financial Times and other financial publications. He was critical of U.S. government pressure on China to speed up the appreciation of its currency to end trade imbalances between the two countries.
“Focusing on the yuan-dollar rate is a serious distraction, and it’s time for the U.S. to back off from bashing China over problems that are born mostly at home,” he wrote in a 2010 Bloomberg News column.
Well-Deserved Spotlight
The ECB will pursue QE for as long as it takes, even if it doesn’t work at all (and it doesn’t).
Thanks to Lacy Hunt for throwing a well-deserved spotlight on Ronald McKinnon.
Mike “Mish” Shedlock
ECB gave a huge shot to my EUR/USD position. I am waiting for the Fed to see if they help as well.
Maybe I’ve been reading too many conspiracy-theories.
But I just can’t call it a coincidence that an IMF’er is being brought in to run the show at the ECB. Was this all orchestrated? What’s next? SDR’s?
They need a political operator to pull-off the next move and Lagarde is a perfect fit. Euro bonds and greater fiscal integration.
No secret to the love the IMF has shown the Euro, just sad that IMF contributing member states didn’t stress the need for complete IMF impartiality.
Impartiality that’s impossible with a French politician as the head of the IMF that now circles back to the ECB.
No coincidences or conspiracy theories – facts.
Not only is there no CB independence but neither was the IMF. All linked by political operators behind closed doors.
Anyone disagree?
The word is “cabal”.
How can it ever be normalized when to do so will probably create carnage amongst zombies with increased unemployment, not gradually but likely as an avalanche?
On the street level people seem very stretched with their cash here in one of the EU member country. Houses and flats cost a normal person 35 years loan to pay if they are in any good location. Madness, if one even considers such and “investment”.
Luckily, banks are tightening loaning even the ECB seems to float endless virtual currency everywhere. I used to be quite happy during 1980’s and 1990’s but somewhere after the 2008 people seem to be very tight on money. I suppose they have loaned what they can in credit cards and such and have mortgages to pay for the next couple decades… This system makes people poorer whatever the supporters of the EU say. Bubbles are blown in every asset group.
Reminds me of the late 1980’s just before the crisis. Banks were lending anyone with a clean credit record 50000 Marks which would make a real nice holiday for people who could not afford – or intend – to pay it back. Now I see similar ads from high interest lending companies (not banks this time). I believe the implosion is imminent in 2-3 years. Or sooner…
Tariff wars, currency wars, savers being denied a just reward. Worse savers wondering wether today’s the day the whole system collapses. Haven’t we seen this sort of thing before?
First time I’m agreeing with a Remainer. But yeah, it’s extremely unfair and this unfairness is probably one of the reasons of the growing discontent in most EU countries. Absolute power, corrupts absolutely…every.single.time!
It strikes me that there is discontent all over the place.
Agreed. I’ve seen all kinds of statistics, the 1% vs the 99%. Those accountable are the central bankers and the politicians. It’s beyond greed, it’s a vulgar transfer of wealth from savers to borrowers. Remember that article about the Germans having lost 158 billion in about 7 years? Think about what that figure would be for the entire EU and perhaps you can understand why those bureaucratic elites are so despised.
You see I don’t see how the CEO’s can be said to be anything but jumped up bureaucrats. They have no skin in the game, except to bump up the share price to swell their pay checks. I don’t mind Bezos or Gates their fortunes. As far as I am concerned they benefit from the profits of enterprise and more power to their elbow. I object to such as Dimon who are nothing but corporatists and have nothing to do with free enterprise. It is not just the politicians who are responsible for the position we are in. All the middle class have been robbed by these banksters.
Blame the manipulative upper echelons of the EU political class. Arrogant, hubristic, detached. They pay no price when they screw up, its borne by “the population” that is given little say.
How many voted to join the Euro?
No say but pay the price.
Massive democratic deficit.
Also, no secret to the love the IMF has shown the Euro, just sad that IMF contributing member states didn’t stress the need for complete IMF impartiality.
Impartiality that’s impossible with a French politician as the head of the IMF that now circles back to the ECB. More manipulation.
No coincidences or conspiracy theories – facts.
Free markets don’t manipulate.
Politicians do, hence they don’t like free markets.
if my memory still serves me right, she once proposed to confiscate x % of saving accounts….. seems we all suffer short memories, thank goodness, otherwise we d all be off running for …well, dunno but running anyway….
That’s next FB.
B U Y I N G T I M E
Whatever It Takes Morphs Into “As Long As It Takes”. Not really a transformation. It’s stalling, buying time, and hoping against hope that it somehow just turns out for the better, or at least, until after the policy-maker /politician’s stint.
Nobody admits to insolvency. Someone else always declares it (“enforcer” shows up as the gambler thinks of new cash-flow excuses and promises). Everything since 2008 is accounting gimmicks. Recapitalizing banks is a gimmick — real capital is produced and saved, not created ex nihilo. Bad banks, cancerous CB balance sheets, buying up your own stock as a business model …
Gimmixxxx Galore.
“They get paid to borrow money, while we are paying interest!”
We? I thought Trump was a gazillionaire… why does he need to borrow money?
I don’t borrow money. Who is he talking about?
Lagarde November?
Draghi needs to keep stock mar, er … for this to work another 2 months.
With near mutiny today, can he?
Wow, you know Lacy Hunt? Impressed.
The financial system would ve been ever so healthy on a european scale and even globally without that fckn insane, disruptive, freaky euro currency ; it was blatantly unfair and totally undemocratic to shove that shit down our throats or up our a***s ! …and to think they were supposed to be intelligent people those that came up with this common monstrosity…Megalomania is a bad advisor the future will show…. Well some fools will say they re having a good time flying into Barcelona or Rome without having to buy Pesetas or Lira…I guess…
Buying peseta or lira is irrelevant when everybody who can afford to travel, use credit card. I know, some hoi polloi might not have a card, but it would be much better if they stayed home – for their own good.
….and airports might become pleasant places again without the 20 Euro ticket rif raf….
… and airports might become pleasant places again without the 20 Euro ticket rif raf ….
Agree with you that Draghi’s program won’t work if it were allowed to happen, and agree with other comments that it is more likely to be counter productive… but it can’t last more than a 12 months, and if CA report is correct only six months.
The German high court already ruled (twice) that the limits are law and are enforceable. Merkel (or whomever the chancellor is next year) and Bundesbank officials could be subject to arrest. Germans take their laws seriously.
Hedge funds and big banks are already running simulations about when the ECB’s authority will run out, and sending the results to their “favored” clients. But the quick consensus seems to be a year or less.
Thanks
I will see if I can find that after reporting on the CPI
The big banks are getting smart, and embedding the email address of each recipient into the PDF when they send research out… if anyone forwards their copy, the banks instantly know who.
Interesting ….
Why did the German high court ruled on it twice, once was not enough for the political class?
Two different legal questions.
One involved whether Merkel could appropriate additional monies toward covering EU related losses. The court ruled that the Bundestag would have to make any additional appropriations if they chose, Merkel must obey the existing limit.
The other involved whether the Chancellor could “temporarily” wave expenditure limits — essentially she wanted to borrow monies from elsewhere in the budget. Again, the court ruled no. No one on the court believed the “temporary” lie, and the majority ruled the legislature had appropriated a specific amount of funds deliberately – ergo the amount could not be increased without legislative approval in written law.
I thought it was interesting that quite a few banks and several hedge funds sent out “protected” (difficult to forward) research within an hour of Draghi’s announcement. They didn’t all reach the same number, but all of them said the program would hit strict limits within a year.
One bank might be a fluke. Two or three there is smoke. A lot more than that and someone is planning something They took the time to run different scenarios versus the window for the next election for Chancellor in Germany might start.
Plenty of hedge funds have made a fortune betting on when a central bank scheme was going to come apart.
It isn’t just Germany that will hit limits, but being the EU’s paymaster Germany’s limit is much more significant than the others
Respect, Country Bob. Your contributions are magnificent! Do tell me which banks I should avoid, would you? I have some money I’d prefer to withdraw before the SHTF.
I don t know whether it is true but Germany is said to have been secretly preparing for a return to the DM in case the euro project eventually falls apart…. which is bound to happen at one point…
They’ll be disciplined and stick with it, wherever it leads. They have a track record of doing that.
“McKinnon specialized in international trade and finance, economic development and monetary theory and policy during his five decades at Stanford.”
Oh yeah? If he’s so smart, how come he’s dead?
Several research reports looked at this latest ECB flop. Not only would the program not work if it actually went on and on, as Mish et al explained — there is the second problem that the program will violate German law in less than 12 months.
Germany’s high court has already ruled TWICE that limits on concentrations of holdings and the loss reserves, both of which were codified into law, are legally binding and Merkel (and/or her successor) must obey them. No exceptions, no “temporary” excuses. The Bundestag will need to appropriate more money (not credit / promises) and do so in a new law — or else the chancellor must obey the existing legal limits.
No matter what Draghi or Lagarde have to say, and no matter how ineffective this nonsense has already proven in Japan and Europe and the USA — the ECB can only throw credit at the problem for, at most, 12 months.
So Lagarde can “do whatever it takes, and this time we are serious”, but she can only do it for 12 months OR LESS. After that, the AfD and other opposition groups can have the chancellor arrested. Yup, Germans take their laws seriously. “You vill follow ze rules or you vill be arrested”
Bundesbank officials who act on behalf of the ECB are also subject to prosecution.
So this latest bout of rubbish from the ECB already has an expiration date, no matter what the politicians lie about
This latest Draghi blunder utterly destroys Powell’s efforts to restore sanity to interest rates, reducing him to being simply the slowest central banker in a race to the bottom.
Not really. See my comment below. There is a strict limit to what German law will allow, even if the ECB wants to continue this nonsense.
Based on current ECB activity and Draghi’s announcement today, the ECB will reach limits set by German law in no more than 12 months (maybe less). The German high court has ruled (twice) that those limits are binding.
The AfD and other opposition groups can literally have the chancellor (Merkel or successor) arrested if she violates the limit. Officials at the Bundesbank can also be arrested if they participate.
Without Germany backing it, the ECB doesn’t matter.
Dozens of banks and hedge funds are already running simulations to see if the ECB will need to stop after 12 months or if it will be forced to stop sooner.
This will not stop them. If there is one takeaway from what has been going on now for more than two decades, it’s that laws will be changed or circumvented whenever necessary to protect the recipients of counterfeit credit. The law exists to protect possession, conquest, and sanctioned monopolies and rackets; repression of petty crime and theft by commoners is only casual by-product, the PR billing so to speak.
They’ve actually systematically changed the laws in almost all jurisdictions in the Western World to bail in depositors as creditors of the bank. Where I live, it took them less than 24 hours to cough up a bail out sum in excess of all the welfare spending of the past 50 years.
Apparently you haven’t heard of Germans and their propensity to obey laws.
You are judging the matter based on the behavior of crooks like Hilary Clinton or James Comey. Not the same thing.
Also, you seem to have overlooked that several opposition parties in Germany would not hesitate to humiliate the chancellor at every opportunity.
The web that binds Germany into the EU and Euro is too tight. No way will they ever allow “the population” to do anything but go along. They will fight to the death to keep the show on the road.
Webej is correct.
Forget laws – can be changed, or just plain ignored.
It really won’t mean anything.
Only total collapse will put a stop to it.
I find it amazing that policy makers can maintain the confidence to continue and increase current policy despite the evidence that it hasn’t worked.
Reminds me of the “shovel ready program”. When it didn’t work, the answer as to why was that it just wasn’t big enough. Same mentality here!
Are these people really too arrogant to even consider that they may not be right?
Oh yeah, they are psychopaths.
If your goal is to create a federal Europe where national governments and banks beholden to the ECB/EU, this is the policy you would take. As the ECB acquires more and more sovereign debt it’s grip on those governments grows ever tighter. It’s all over save the crying when the silk scarf of easy bond sales is revealed to be the leash of debtor’s prison. It’ll probably take another decade to play out though.
“Counterproductive Policy”
Pushing on a string doesn’t work very well.
There is no need for lower interest rates (or a central bank for that matter) when financial markets will gladly buy stocks and lend money.
The post-Bretton Woods, debt-based fiat monetary system has already far exceeded its shelf life. We can expect ever more bizarre Central Bank shenanigans, as they desperately try to keep it going.