Draghi drags QE into normalcy

by Chris Becker

The central banker elite meet in Jackson Hole, Wyoming for their annual symposium later this week, but ECB President Mario Draghi made traders sit up and notice a day or two early last night with a speech in Germany. What was surprising, particularly in the midst of the anti-QE brigade, was his staunch support for quantitative easing (QE) that so far has made economies “more resilient”.

So we’ve gone from emergency one-time measures, to “mild tapering”, to monthly purchases, to “this is awesome, makes us all better”.

Here’s the speech via Bloomberg:

Money (sic) quotes for those unable to watch it:

“when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power”

“you need serious conceptual analysis and base policy on that, not on prejudice, or — even worse — on moral grounds,” he told reporters after his speech. “Some people say ‘Oh, QE is immoral, because it creates money out of nothing.”

“a large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the United States”

We all know what happens when central banks do studies on themselves and their own performance, don’t we Martin Place?

Is there an end game to all this bond buying or are we all turning Japanese? Some have likened QE and the way central bankers see it as a hammer to hit all nails, real or imaginary, as “heroin”:

Nicholas Macpherson, who was permanent secretary to the Treasury from 2005 to 2016, said on Twitter on Monday that attempts to boost the money supply through bond purchases are increasingly leading to “negative side-effects.

Bond traders are fretting that both the ECB and the BOJ are running out of bonds to scoop up as part of their expansive QE programs. With the Fed trying to wind down its own QE without pulling the rug out under the huge bubble in sovereign bonds, this is shaping up to be a massive market risk as overvalued stocks also put managers under pressure on where to allocate funds.

From the FT:

The ECB’s own rules restrict it to only purchasing a third of each country’s debt in circulation, and the supply of German Bunds and Portuguese debt in particular is starting to run thin.

“The 33 per cent issuer limit in Bunds presets a course of [purchase programme] exit, no matter the inflation outlook,” says Harvinder Sian, a Citigroup analyst.

The problem is inflation, or a lack thereof. While in toto the EU economy is recovering on a GDP basis, there has been a trend down in inflation this year to 1.3% last month after hitting 2% earlier:

The best estimates are for inflation to stabilise at around 1.4% next year, nowhere near where Mario Draghi sees animal spirits takeover and thus continue the bond buying program.

The problem of supply of bonds stems from an unlikely place: Germany, where the ECB owns ca.€400 billion of its €2.1 trillion bonds – almost hitting the one third limit rule.

More from FT:

That would effectively force the central bank to selectively taper its bond-buying programme by continuing to purchase the debt of peripheral countries while quitting Germany’s debt markets. The ECB is also approaching its purchase threshold in some smaller eurozone countries. It will max out on Portuguese, Dutch and Irish debt next spring, according to estimates by UBS.

The declining supply of bonds available also means that the ECB is “at risk of reducing stimulus too soon”, says Richard Turnill, global chief investment strategist at BlackRock.

Although many want monetary policy normalisation as soon as possible, the reality is that the European and Japanese economies remain structurally weak with a huge overhang of debt as they struggle to climb out of a potential deflationary spiral.

There are lessons here for the boffins in Martin Place who may have to enact similar QE measures down the road, but I’m not sure they have the right culture in place to look both outward and outside the central banking paradigm.

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  1. Surely, no one is surprised with Draghi’s comments.
    It’s either qe or austerity.
    There is not going to be austerity.

  2. Draghi

    “…Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defense of previously held paradigms that have lost any explanatory power…”

    It does not get any more shameless than this.

    There has been no change in the paradigm at all.

    The paradigm remains one where any alternative to private bank credit creation is simply ignored by Central Bankers.

    Why would they entertain an alternative that would reduce their role from a Masters of the Universe back to mild mannered cardigan wearing paper shufflers?

    The only change has been that an implicit dependence by private banking on the full faith and credit of the public has become explicit.

    Asset prices fluffed and pumped by private bank credit creation are now maintained and further fluffed by an endless stream of central bank public sector credit creation.

    But when it comes to the general public the message from the likes of Draghi, Yellen, Stevens, Lowe and Ellis is simple.

    Get stuffed and suck it up.

    Drop your wages you peasants or find a better job and richer parents.

    And still some people reckon that the banking and monetary system does not require urgent and fundamental reform.

    • migtronixMEMBER

      “we’ve had a close look and with fresh unencumbered eyes, yes, neoliberalism is still the best path”

      Where’s that nice German feminist that made him shit his presser?

  3. Lets put this in plain English

    There is so much debt out there that if we don’t continue this madness it will all come crashing down and me and my mates are at risk of loosing everything !

    • AF you are bang on. Its the same scenario that happened in the financial crisis. It wasn’t the poor or average man going to get crushed then, it was the rich and boy didn’t they act fast to prevent that happening…..and lets be honest the way its set up now asset prices are permanently supported by the Govt ‘put’ and so the rich will remain so ad infinitum to the expense of everyone else!

  4. you need serious conceptual analysis and base policy on that, not on prejudice, or — even worse — on moral grounds.

    Heaven forbid we allow morals to govern banking! What a wanker. His friends at GS will be pleased. This sort of thing is why the EU has such a poor rep.

    The guy is further inflating the risk profile in the northern European memberstates, eg. the housing market in The Netherlands has gone beserk once more and everyone has forgotten 2007… But what is one to do if the interest on your savings in 0.15% while mortgage interest (deductable from your income tax for owner occupiers) is at the lowest levels ever and you see everyone piling into the market.

    For those interested – Housing Prices in The Netherlands visualised:

    Bring on 2019. Expect Germany to weigh in heavily to have a German appointed as president of the ECB. If you want to try and risk it making money using cheap credit, do it before then.

    • Jumping jack flash



      What the hell is risk?

      Ohh, you must mean Rich!!
      Oh yes, keep piling on the debt and everyone will be stinking rich beyond belief, in absolutely no time at all. Well, as quickly as it takes someone else to borrow a mountain of debt and hand it to you.