Friday, September 5, 2014

 Back in June I wrote that the ECB would eventually yield to market forces and pressure from politicos in Europe and begin a course of QE. It appears that the ECB is now embarking on a path down the road of perdition. Nevertheless my view was that European stocks would benefit from the new money printing. I remain convinced that the money printing will do nothing to help the moribund economies in Europe. However it will, if history serves us right, cause stocks to go up. I am not here to make policy its about making money. I remain long European stocks.

The Acting Man blog has a good review of the ECB's plan and commentary on why it will not work.


The announcement included: further rate cuts; with the repo rate now at 5 basis points, which we might as well call zero, this avenue is now rapidly closing. Since all rates were cut, they also increased the bizarre penalty rate on excess reserves to minus 20 basis points. All this measure achieves is that it costs the banks money. It's not going to make them more eager to lend, but it will lead to them cutting the paltry interest they pay to savers even further. So the war on savers is continuing at full blast.


After the last major inflationary push by the ECB (the LTROs of 2011/12), a brief surge in money supply growth triggered a temporary and evidently illusory spurt in economic activity. This Potemkin village quickly crumbled again, the very moment money supply growth declined back toward 5% y/y. The measures announced this Thursday may well achieve a similar Pyrrhic victory – but what then? Indeed, what Pyrrhus of Epirus is said to have remarked in the context of his victorious battles against the Romans can probably be applied in this context as well. 

One only needs to adjust his saying a bit:

“If we are victorious in one more battle with the faltering recovery, we shall be utterly ruined”.

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