The ECB quandary

realitykeeper

For the last few months the ECB has been hinting at further interest rate cuts and possible money printing to stimulate growth and get inflation to a healthy 2%.

If they cut interest rates, it is likely to be a very small cut - maybe a little as 0.1%. Surely if cutting interest rates was the answer to the financial crisis it would have worked by now, having been cut from nearly 4% back in 2008. Very small cuts in interest rates now seem to smack of desperation. The ECB know if they go to 0% the depositors will send their money out of Europe because they want higher interest. Another indication of this desperation is in what the ECB call "Forward Guidance" - which is just another way of saying "talking up the economy."

These measures are intended to force the banks to lend. It is a risky strategy and even if it works it is hardly the basis on which a bank can make a sound investment. It may increase inflation in the short term as people/businesses will have access to more money but if that money is not used prudently and exclusively in building export orientated business then it is wasted or used to inflate the economy. Of course, inflating the economy through internal growth in areas like retail is the intended purpose but it is a dangerous short sighted goal with long term consequences.

The other option for the ECB is to print euros. Unfortunately, if they print Euros, then people with Euros will dump the currency often in favour of another currency - effectively sending money out of Europe.

So either option the ECB chooses may boost short term economic activity within the EU but both options will see a flight of capital from Europe and the possibility of longer term systemic risks. Here is an analogy for the money printing. It is like pouring cordial from a jug and then topping it up with water. Eventually it will become as weak as water.

If the ECB do go down the road of QE, then they will be doing the same as the US and Japan. * If all the first world countries continue to weaken their currencies against each other then the currencies of other countries will strengthen by comparison so the cost of goods from the second and third world will all rise. If the first world economies crash, they will crash together.

So what is the solution? Massive and sustained austerity in order to regain some economic competitiveness against the second and third world. Once competitiveness is restored, the economy will grow sustainably and organically. The hardship brought about by austerity is good for people. Am I wrong?

cabledude

Write off all consumer debt in the eurozone and start again.

realitykeeper

cabledude wrote: »

Write off all consumer debt in the eurozone and start again.

No

Frank Lee Midere

cabledude wrote: »

Write off all consumer debt in the eurozone and start again.

If we started again from that I'd get a million euro loan.

washman3

Frank Lee Midere wrote: »

If we started again from that I'd get a million euro loan.

Seems now that that was the mistake most of us made.!! We should have all have borrowed a million or maybe two.


P.S. those of us who 'didn't party' that is..

RichardAnd

The quantitative easing in the US saw billions go straight into the stock market. If it happens here, I would love to know where it would end up.

cabledude

realitykeeper wrote: »

No

Whats your solution then. Your op doesn't suggest a solution to the problem. Do you have one?

Geuze

cabledude wrote: »

Write off all consumer debt in the eurozone and start again.

wRITING OFF consumer debt implies a massive drop in the value of loan assets on banks balance sheets.

Which liability should fall in line with the fall in assets?

Savers deposits?
Bank bonds?

SpaceTime

RichardAnd wrote: »

The quantitative easing in the US saw billions go straight into the stock market. If it happens here, I would love to know where it would end up.

Mostly on the US and London stock markets probably.

SupaNova2

realitykeeper wrote: »

because they know if they go to zero the depositors will send their money out of Europe because they want higher interest.

Depositors can look for higher interest rates elsewhere but the euro can easily strengthen against a currency offering a higher interest rate, meaning they could actually end up with less euros for their effort.

cabledude

Geuze wrote: »

wRITING OFF consumer debt implies a massive drop in the value of loan assets on banks balance sheets.

Which liability should fall in line with the fall in assets?

Savers deposits?
Bank bonds?

Both

View

realitykeeper wrote: »

For the last few months the ECB has been hinting at further interest rate cuts and possible money printing to stimulate growth and get inflation to a healthy 2%.

The ECB's task is to focus on inflation. It has no remit to "stimulate growth". That is left to the governments and/or markets.

Should a rate cut stimulate growth as a by-product then given the low inflation rate no one will complain but any ECB intervention will be shut off quickly once inflation starts heading toward 1.5% or so.

comongethappy

cabledude wrote: »

Both

You first!

Voltex

I think the OP's observation is bounded by the market perspective. Lower interest rates will allow business to make the investments decision now rather than later effecting a multiplier effect through national economies.

The search for yield is fairly obvious these days with Irish 10 years paying 2.6%.

I don't think the ECB is looking to stimulate growth..but rather improve the conditions of credit demand.

realitykeeper

cabledude wrote: »

Whats your solution then. Your op doesn't suggest a solution to the problem. Do you have one?

The final paragraph begins with the words: "So what`s the solution?" It then gives the solution.

realitykeeper

SupaNova2 wrote: »

Depositors can look for higher interest rates elsewhere but the euro can easily strengthen against a currency offering a higher interest rate, meaning they could actually end up with less euros for their effort.

This is unlikely because the ECB is also considering printing euros or some form of QE in order to weaken to Euro against other currencies. As long as deflation or low inflation remain a concern, the ECB will have to prevent the Euro from strengthening and weaken the currency if the problem persists. If Japan`s lost decade is anything to go by, it will persist.

coolshannagh28

The damage is already done , by paying off all the bondholders in the last crisis a precedent has been set and the voracious appetite of the markets for money means there will be no trickle down. The EU is in a bind because the Draghi bluff to "do whatever it takes" is slowly being called by the markets ,deflation is the result of talking but not acting and the quandary is if you act the markets gobble the money and deflation persists. The levels of disparity this process has created is politically dangerous and add Ukraine to the mix and anything is possible.

SupaNova2

coolshannagh28 wrote: »

The EU is in a bind because the Draghi bluff to "do whatever it takes" is slowly being called by the markets ,deflation is the result of talking but not acting and the quandary is if you act the markets gobble the money and deflation persists. The levels of disparity this process has created is politically dangerous and add Ukraine to the mix and anything is possible.

We haven't had deflation though and the euro is still here. In what way is Draghi's comment to "do whatever it takes" a bluff?

coolshannagh28

SupaNova2 wrote: »

We haven't had deflation though and the euro is still here. In what way is Draghi's comment to "do whatever it takes" a bluff?

He hasn't done any QE yet and the Germans have given tacit approval to his strategy but will baulk at actually printing money,

SupaNova2

coolshannagh28 wrote: »

He hasn't done any QE yet and the Germans have given tacit approval to his strategy but will baulk at actually printing money,

But Draghi never promised QE, the full quote:
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," .

coolshannagh28

SupaNova2 wrote: »

But Draghi never promised QE, the full quote:
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," .

What does that entail if not QE and again I point out that this is still just a statement which he will eventually have to back up

SupaNova2

What makes you so convinced that the current course of action is not enough? Why is US style QE an inevitability?

Permabear

This post has been deleted.

Kermit.de.frog

Permabear wrote: »

This post had been deleted.

Never used.

The ECB has managed somehow to talk the market in to a frenzy for 2 years. But market patience as we saw on Thursday can disappear very quickly. They have to actually do something this time. The rumored 200bn SME lending is too little. They need to go out and buy bonds. They need more like €1trn QE and interest rate cuts.

realitykeeper

Monetary accommodation cannot solve the crisis. This is because the root cause was structural, not monetary.

Looking at the ECB and the steps it is taking is a clearly signposted road to the endgame. The measures will become increasing desperate. The fact they have not made any adjustments in recent months demonstrates their reluctance to act. Should they take measures in monetary easing in future it will be because they feel they have no alternative. If they cut interest rates by a miserable 0.1% it would clearly demonstrate this desperation/reluctance which is why they may opt to cut by 0.25% instead. Similarly, QE in whatever guise is still just a monetary adjustment and it is not going to change the underlying fundamentals of the EU economy. Only structural reform such as austerity (and lots of it) can salvage the situation.

The credit crunch and its aftermath has wounded the EU and other first world economies. If these economies are still wounded when the next major recession hits, they will not be able to survive as normal economic entities. In other words, a lot of people will suffer.

coolshannagh28

realitykeeper wrote: »

Monetary accommodation cannot solve the crisis. This is because the root cause was structural, not monetary.

Looking at the ECB and the steps it is taking is a clearly signposted road to the endgame. The measures will become increasing desperate. The fact they have not made any adjustments in recent months demonstrates their reluctance to act. Should they take measures in monetary easing in future it will be because they feel they have no alternative. If they cut interest rates by a miserable 0.1% it would clearly demonstrate this desperation/reluctance which is why they may opt to cut by 0.25% instead. Similarly, QE in whatever guise is still just a monetary adjustment and it is not going to change the underlying fundamentals of the EU economy. Only structural reform such as austerity (and lots of it) can salvage the situation.

The credit crunch and its aftermath has wounded the EU and other first world economies. If these economies are still wounded when the next major recession hits, they will not be able to survive as normal economic entities. In other words, a lot of people will suffer.

Agree with this ,if interest rates of .25% cannot move the economy QE in the form s used at present will be ineffective as there is no trickledown .
We have bandaid solutions to structural problems in most western economies and the only questions are when and what will precipitate the next real crisis

SupaNova2

Is the relative tightness of the ECB not forcing some albeit slow structural change from governments such as getting their budgets under control? An expansive QE program makes it cheaper for governments to deficit spend.

desertcircus

realitykeeper wrote: »

The final paragraph begins with the words: "So what`s the solution?" It then gives the solution.

In a Europe riddled with growing fascist parties, open hostility between countries and entire populations furious about their living standards falling, seriously suggesting sustained large-scale ongoing austerity is only just short of claiming the continent really could do with a good long war.

Permabear

This post has been deleted.

odd1

http://www.ihs.ac.at/publications/lib/ep26.pdf

Would universal VAT rates across europe help inflation? I know its outside the brief of the ECB, but I presume governments and central banks work together sometimes.

McKrab

coolshannagh28 wrote: »

He hasn't done any QE yet and the Germans have given tacit approval to his strategy but will baulk at actually printing money,

Lowering interest rates in any way requires increasing the money supply, but it's not the equivalent of "printing money". The only difference between QE and conventional monetary policy is that the ECB would be specifically targeting long term interest rates, since the short term ones are approaching zero.

coolshannagh28

McKrab wrote: »

Lowering interest rates in any way requires increasing the money supply, but it's not the equivalent of "printing money". The only difference between QE and conventional monetary policy is that the ECB would be specifically targeting long term interest rates, since the short term ones are approaching zero.

If it walks like a duck and quacks like a duck it generally is a duck the point is that the ECB is running out of effective tools to address repressed demand and possible deflation ,QE is a further measure in this armoury which the Americans have been using aggressively to little effect and there is no reason to expect that the more conservative ECB will be any more successful .
Printing money or buying bonds or whatever you call it places money at the disposal of the markets who gobble it up to little genuine effect on real demand . It is any excellent means of creating disparity possibly as dangerous as deflation in its own way

LordNorbury

The EU should set up a bank network that has outlets in every EU country, that has only one purpose/mandate, and that mandate would be to lend to SME's, which is where the majority of people in the EU are gainfully employed.

The ECB should inject seed capital into this new banking network, basically pumping liquidity into the bottom of the economy, where it can do something useful like support the creation of small business and job creation, instead of pumping billions of Euro into banks at the top of the economy where the money ends up getting completely hoovered up on speculative activities and on the stock markets. "Trickle down" doesn't work, because the greed within the banking sector and the stock markets, which caused this crisis, stops "trickle down" from working.

The ECB isn't any use, it has a failed mandate to only deal with inflation, it has no mandate to deal with the problems that the EU has today, just think about this for a sec, 6 years into this recession, that simple problem hasn't been rectified, such as the sheer uselessness of the EU as an institution, yet everyone still says, "we need to stay close to Europe", it's like some sort of personality cult the EU, what it has evolved into.

realitykeeper

desertcircus wrote: »

In a Europe riddled with growing fascist parties, open hostility between countries and entire populations furious about their living standards falling, seriously suggesting sustained large-scale ongoing austerity is only just short of claiming the continent really could do with a good long war.

Extreme austerity which is self imposed is far better than extreme austerity that results from an economy spiraling out of control. Obviously people would have to be told why extreme austerity is necessary and once they understand that they will be prepared for what must come.

A genuine depression resulting from a financial crash however is frightening. In that scenario, there is no way of controlling the free falling economy. At least if it were self imposed, the government could put in place soup kitchens and emergency shelters for the destitute.

LordNorbury

Following on from my post yesterday, today the Irish Government have announced a new bank that will lend directly to SME's, thereby going around the Irish banks, they should go one step further and take 1 billion Euro from AIB and BOI and put it into this new bank, problem sorted...

Frank Lee Midere

LordNorbury wrote: »

Following on from my post yesterday, today the Irish Government have announced a new bank that will lend directly to SME's, thereby going around the Irish banks, they should go one step further and take 1 billion Euro from AIB and BOI and put it into this new bank, problem sorted...

This might work. Better than housing anyway.