Archive for the ‘European Central Bank’ Category

Mutually Assured Destruction

Monday, March 14th, 2016

Iran, North Korea and the world’s other despots may be able to take over the world without going nuclear or even firing a single shot.

That’s because much of the free world seems bent on destruction from within, done in by a Keynesian death spiral.

Apparently, no one believes in capitalism anymore.  Instead, central bankers, who now control the economy in most of the world, are hell-bent on continuing to dig the negative-interest-rate hole ever deeper, until it is impossible to climb out.

While central bankers have only made matters worse with their easier-than-easy monetary policies, they’re so deeply invested, and so far down the rabbit hole of negative interest rates, they can’t turn back. Draghi

It may not be working, but admitting as much would bruise many strong egos, scare investors and sink stock prices.  So they keep digging.

A Bigger Bazooka

A year ago, Mario Draghi, head of the European Central Bank, announced the start of an asset-purchasing program similar to the Federal Reserve Board’s quantitative easing (QE) program through which the ECB would spend €60 billion a month on Eurozone government bonds.

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ECB: Cheap Oil Is the Problem, Not Iran’s Nukes

Monday, September 7th, 2015

If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.

What’s the big deal?  Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.

Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit.  OMG!!!

"Government debt gdp" by Jirka.h23 - Own work. Licensed under CC BY-SA 3.0 via Commons.

“Government debt gdp” by Jirka.h23 – Own work. Licensed under CC BY-SA 3.0 via Commons.

Not to worry.  Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.

Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus.  (more…)

Bazooka or Blunderbuss?

Monday, March 16th, 2015

Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.Bazooka 2

Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.

He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.

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The United States of Europe

Monday, January 26th, 2015

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Does this look like deflation to you?

Does this look like deflation to you?

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets. (more…)

It “Eats Societies Alive”

Monday, January 5th, 2015

“Oh, no!” you’ve probably been thinking.  “The cost of filling my gas tank dropped again!”

Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported.  But behind every silver lining, there’s a black cloud and leave it to us to find it. Deflation

Deflation is typically a sign that all is not well with the economy.  Prices drop when the economy is so weak that consumer demand drops.  When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase.  Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation.  Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.

Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”

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Give Us Back Our Gold!

Monday, December 1st, 2014

“This is gold, Mr. Bond.  All my life I’ve been in love with its color … its brilliance, its divine heaviness.”

                                                   Auric Goldfinger

Gold prices recently hit a four-year low, while stock prices seem to hit a new record almost weekly.  So which is the better investment today?

Before answering that question, consider the latest worldwide trend.  “Repatriating” gold is becoming as fashionable as quantitative easing and stimulus spending.

Germany’s central bank started the trend last year with its decision to return some of the country’s gold home from vaults in the U.S. and Paris.  It was followed by a campaign called “Bring Our Gold Back Home,” but Germany has since backed off on plans to repatriate more gold.Gold Prices

Netherlands has already moved 122 tons of gold back home.  And Switzerland voted yesterday on its “Save Our Swiss Gold” initiative, which would force the Swiss National Bank to buy gold every time it buys euros, which it has done to curb the rise of the Swiss franc.

If the initiative were to pass, Zerohedge noted, “it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.”

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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It’s a Mad, Mad, Mad, Mad World

Friday, August 8th, 2014

Isn’t summer supposed to be the time when life slows down and the world takes a vacation?

That may be the case for some of us, but the despots of the world are working overtime.  Consider just a few of the world crises taking place this summer:

  • Russia’s conflict with Ukraine continues.  The downing of Malaysian Airlines Flight 17 by pro-Russian rebels has done little to stop it.
  • Hamas is fighting with Israel over Gaza.  A cease fire is in place, but Hamas has shown little respect for previous cease fires and it is unlikely that this crisis has ended.
  • Muslim terrorists known as ISIS are making inroads in Iraq.  It’s reached the point where President Obama has reversed his policy and announced that U.S. military airstrikes will take place “if necessary.”
  • Syrian leader Bashar al-Assad continues to slaughter his people, while the country’s conflict threatens to spill over into Lebanon.
  • The newly inaugurated Libyan parliament has called for a cease fire and threatened to act against warring militias that continue fighting.
  • Al-Qaeda-linked sect Boko Haram continues to hold more than 200 schoolgirls captive in Nigeria.
  • Iran is developing nuclear weapons, although the U.S. State Department said U.S. and Iranian officials had a “constructive discussion” this week about Iran’s nuclear program.  There’s some conjecture that, even if Iran were to agree to halt its nuclear development program, it could outsource the program to North Korea.

    Gaza today.

    Gaza today.

Remember the end of the Cold War, the resulting “peace dividend” and the economic growth of the ’90s?  Remember life before the financial crisis?  Much has happened since then and most of it has not been good.

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Mario the Magnificent

Friday, June 6th, 2014

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Mario Draghi

Mario Draghi

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

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Talking the Talk

Friday, May 9th, 2014

When’s the last time you’ve heard anything about the sovereign debt crisis?

We’ve seen more activity in a tortoise than we’ve seen in Europe of late.  Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.

Europe, though, has been quietly going about its business in much the same way as the U.S.  Bond yields have been at record lows and stock prices have been near record highs across the continent.  But, as in the U.S., just because the market is performing well, it doesn’t mean the economy is performing well.

The jobless rate in Greece is 26.7% and Spain is not far behind at 25.3%.  Overall, unemployment is at 11.8%.  In comparison, the U.S. rate is 6.3% … although the U-6 rate remains at 12.3%.Europe

Forward Guidance in Europe

Seemingly, the difference between Europe’s approach and the U.S. approach has been Europe’s reliance on forward guidance, which to date has propped up Europe’s markets.

There was talk about relying on forward guidance in the U.S. last year, but instead the Federal Reserve Board continued to buy bonds.  Talk about forward guidance is ironic, given that forward guidance is simply the act of talking … saying what you expect to do without actually doing much of anything.

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