Daily Commentary: The ECB’s move toward monetisation
The ECB’s forward guidance last week was begun with unanimous support including the German contingent. I think this is a very significant development in the European sovereign debt crisis because it moves the ECB that much closer to full blown monetisation. A few brief comments below
I first discussed “rate easing” in November 2010 in response to reports that the FOMC considered offering unlimited quantitative easing to target long-term interest rates. At the time I had this to say about QE2:
The first round of QE was somewhat defensible as a measure to provide lender of last resort liquidity. This round is different. I do not advocate more QE. Nevertheless, my view is that QE will be ineffective in large part because the Fed has not taken any of the three more draconian measures I highlighted above. Moreover, QE has been that much more destructive because it has damaged America’s negotiating position abroad and made the Fed a lightening rod of criticism. Meanwhile, Ben Bernanke continues to argue that QE will create jobs when all indications are that it will not – unless they are willing to target interest rates lower with an unlimited supply of liquidity. Then, and only then, would we have to worry about inflation from the huge amounts of money sloshing around the system.
I would still contend today that all of the Fed’s quantity-based easing measures have been mostly ineffective, especially in the wake of a large private sector debt crisis. But the Fed did begin “rate easing” with its third easing campaign in August 2011.
Now, rate easing is where, instead of simply offering up quantity targets for asset purchases, the Fed actively targets a longer-term policy rate. Forward guidance is a soft form of this. QE1 and QE2 were pure quantity-based easing measures. But beginning in August 2011, the Fed began to supplement its quantity-based easing measures with price-based measures, which are more effective in lowering interest rates.
Now the ECB has moved into rate easing mode with its own forward guidance. By offering forward guidance on policy rates, the central bank anchors investor expectations for future interest rates and takes a much more direct influence over longer rates. Effectively, the central bank is saying, low short-term rates are not enough stimulus. We need lower long-term rates as well. And so we will try to lower them by telegraphing much more explicitly what the future path of policy rates will look like.
The ECB can couch this move in terms of the need to offer easier economic conditions. However, the most direct beneficiary of lower rates are government debtors in the eurozone as the forward guidance effectively lowers the risk free rate in the euro zone. In essence, the ECB is one step short of actively monetizing euro area government debt – and this is being done with the explicit approval of all members of the German monetary policy elite!
What this tells me is that the ECB is very concerned about the state of the economy in Europe and is willing to go to extra lengths to prevent a nasty debt deflation from expanding to the core. Germany is at risk of recession while France, Finland and the Netherlands are already in recession. Now the austerity yoke has been partially removed by backloading the measures. And the ECB has upped the ante by moving into rate easing territory. This policy stance will give the euro zone some breathing room and I expect the economy there to recover by sometime later this year. For now, I am concentrating on this facet. There are unintended consequences that we can discuss later.
Today’s links are below.
Women Prefer Men Holding State Bonds, Japan Ad Says – Bloomberg
“Japanese women are seeking men who invest in government bonds, according to an advertisement being run by the Ministry of Finance.
“I want my future husband to be diligent about money,” a 27-year-old woman says in an ad being run in free magazines promoting a fixed-rate, three-year note that Japan started selling last week. “Playboys are no good.” She’s one of five women featured in the page, which says “Men who hold JGBs are popular with women!!” “
Germans Love the Mark More As United Europe Gets Closer – New York Times
Why I Became a Chinese Shadow Banker – Bloomberg
China faces a difficult credit bubble workout – FT.com
“China is in the midst of a classic credit bubble. The ratio of total credit to gross domestic product has risen from around 115 per cent in 2008 to an estimated 173 per cent, an acceleration in credit expansion that has spelt danger in many other economies. Much of this has come in the poorly regulated shadow banking sector, where the annual rate of credit expansion exceeds 50 per cent. The Chinese authorities are signalling, correctly, that this must slow sharply.”
Chronic Cardio is Still Unhealthy | Mark’s Daily Apple
Mad Latvia defies its own people to join the euro – Telegraph Blogs
Privacy and the Threat to the Self – NYTimes.com
America Is No Longer the Most Obese Country in the World
Japan plans to switch inflation gauge; may up pressure on BOJ | Reuters
Greek outlook bleaker than lenders think, local think tank calculates | Reuters
When you read this, the first thing that comes to mind is the euro. How is being in the euro good for Greece? If they had left the eurozone, would life have been any worse? I doubt it.
ekathimerini.com | Greece sells 1.625 bln euros of 6-month T-bills, yield steady
Hints surface that NSA building massive, pervasive surveillance capability | McClatchy
What Happens in Detroit Won’t Stay in Detroit – Bloomberg
Pollution Leads to Drop in Life Span in Northern China, Research Finds – NYTimes.com
China inflation picks up, limits room for policy easing | Reuters
Brazil acts on US spying allegations – FT.com
Confirmation Bias « You Are Not So Smart
Apple ‘cut iPhone production by 20pc’ – Telegraph
Court Rejects State Secrets Defense in Dragnet Surveillance Case | Threat Level | Wired.com
Fed Taper Would Swap Stimulus for U.S. Market Stability: Economy – Bloomberg
Judge Orders U.S. to Release Aaron Swartz’s Secret Service File | Threat Level | Wired.com
Why Twitter Finally Killed The “Auto Follow” For Good | TechCrunch
Privacy Group Asks Supreme Court to Halt NSA Phone Spying | Threat Level | Wired.com
Eurozone warns on Portugal as it decides on Greece aid – Independent.ie
Consumer credit rises by most in a year | Reuters
French business leaders lash out at Francois Hollande – Telegraph
ekathimerini.com | Eurogroup Statement on Greece
macroblog: Let’s Talk about Oil
On That September Tapering – Tim Duy’s Fed Watch
Arbeitslosenquote sinkt unter 3 Prozent – News Wirtschaft: Konjunktur – tagesanzeiger.ch
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