ECB QE Begins

Draghi Commits to Trillion-Euro QE

bloomberg.com/news/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight.html

First thought is, will buying government bonds have much of an effect given interest rates are already so low ?

8DD 8DD 8DD 8DD

Worked well for the yanks I guess!

Introductory statement to the press conference
Mario Draghi, President of the ECB,
Frankfurt am Main, 22 January 2015
ecb.europa.eu/press/presscon … 22.en.html

Looks complicated.

Where’s me free money?

In simple terms please.

What does this mean for property prices?

What does this mean for those with mortgages? ( especially the repayment amount)

What does this mean for mortgage principal? (Will it be worth less)

Thanks

IMHO, it will have little to no effect on the economy of Ireland or the EU and Eurozone.

The effect is to increase demand for bonds thus keep their yields low, as a result it’s hoped, to push institutional investors towards purchasing riskier, higher yielding assets thus boosting the price of those assets, which in some way that remains beyond my comprehension, is hoped to drive capital investment. The only direct link that easily springs to mind is that in increasing share prices, senior bank management, who will be graded on their institutions share price, will get larger bonuses, and so purchase a new Maybach, Bentley, Rolls or two, therefore, increasing their capital expenditure.

I’m sure there have been long discussions in imposing buildings populated by important people who have figured out what it’s supposed to do, but I still can’t get past the South Park Undperpants Gnome analogy

But then again, maybe I’m a little slow … :neutral_face:

Blue Horseshoe

This all brings me back to Harry Dent.
His thesis is that demographics are the largest determinant of economic activity.

People spend differently throughout various stages of their lives.
A 30yo has different spending habits to a 60yo.
As Europe (and the States) ages, the overall spending reflects this demographic shift.

His main argument is that after 47/48 your spending dips and all the money pumping in the world wont change that.

Especially as the ECB’s (& FED’s) main strategy is to increase the money supply through increased lending.
If nobody wants to borrow, then it’s an ineffectual strategy.

Ireland is slightly younger than the rest of the EU, so we’ll have a slightly different outcome.
But the EU will follow the same as the States - an initial bump up and then falling back towards long term economic activity influenced by demographics.

IMO the biggest effects for Ireland will come from a combination of search for yield and $/£ appreciation.

If there is an effect of property prices it will be up.

Is it not the case that the bad debts carried by banks are purchased by QE which cleans up their balance sheets allowing them to effectively start over and lend again?

Am I missing something?

+1

Both of which can only be good.

I guess the euro stock markets will rise accordingly going by the u.s experience.

with my very limited economic knowledge would it be better for every central bank to give 10K to each taxpayer(apologies to scangers but well its for the best) and let them use at least 50% on personal debt and have the choice to use the other 50% on personal consumption or pay down debt.

this action will just pump asset prices when the real problem is crippling debt across the eurozone.

Follow the money.
Or rather, follow the lending.

Who is borrowing the cash and where are they spending it ?

In the USA, the money isn’t filtering down the system, but staying squarely in the top 10% of earners.
As they already have enough discretionary income, it’s flowing into their asset base - hence the stock market is at all-time highs.

Question then is, will Europe’s cashflow run on similar lines or will it be more democratic ?

The problem being that demand determines borrowing far more than basis point changes in interest rates.

QE in the Eurozone has two impacts: 1) With risk-sharing it strengthens the belief in the solidity of the Eurozone - i.e. its ultimate federalisation; of course Greece could detonate that over the next few months; 2) It weakens the currency through a strong placebo effect - driving selling by large portfolios such as pension funds and indeed, as we’ve seen, other Central Banks; this helps to counter the flow of the Eurozone trade surplus which, obviously, requires the excess purchase of Euros by foreigners to buy Euro denominated exports.

The main economic impact for people will be seen through the second route of currency weakening. This fits in with the (mistaken) German mercantilist dogma that ‘exports are the route to wealth and growth’; the Germans having (still) not shifted their thinking from a hard currency era to today’s modern fiat era.

You are completely correct — helicopter drops are FISCAL operations, NOT monetary.

But people, especially Central Bankers themselves :laughing: and those raised during the advancement of this Central Bank hegemony, are desperate to hold on to the falsehood that Central Banks are omnipotent.

Yeup, that’s the model, however, here’s the elephant in the room, interest rates are already on the floor. If rates were high, or even near historical norms, then there’s a good arguement that could be built around giving QE a go, but in a low interest rate environment what’s it supposed to do? Despite the low rates, confidence is also low so borrowing has remained subdued (both from an industry/commercial and personal perspective).

Pushing institutional investors into other asset classes just increases demand for those assets, increases their prices and boosts the investors balance sheets. Maybe that’ll instil some corporate “feel good factor” and kick start things, maybe it won’t. The other possibility, is that speculation around commodity prices may increase thus driving up inflation and then again, maybe it won’t. The nebulous and to some, all powerful entity known as “The Markets” might like it, but it is not the real economy and it seems, along with the financial institutions that feed it and feed off it, has become more and more detached from the underlying realities of the economies around which they orbit.

Blue Horseshoe

What I don’t get is why the ECB don’t acquire financial assets behind labour intensive infrastructure projects (Junkers latest wheeze perhaps?). This would directly create employment, while the infrastructure itself would yield an economic return over time. Maybe this is being a bit simplistic

Agree, Euro has already weakend hugely against sterling over the last few months, should be seeing some expected and probably some unanticipated effects of this if it continues and persists.

I wish something like this had happened as a once-off rescue measure , it would have been the obvious solution to avoid loading bad bank debts onto national balance sheets and would have avoided much of the pain of the ensuing counter-cyclical austerity programmes. But not with the Germans in charge…maybe it might happen for the next banking crisis now that the ECB have (eventually) got some sort of QE out the door.

Would that have weakened the currency more than printing the same quantity of money in an economy that didn’t have those bad debts, or more than than not using it to selectively relieve banks of them without burdening governments? I mean that from a psychological view, if nothing else, people worldwide would have less confidence in a currency that was apparently secured on a greater proportion of worthless assets that couldn’t be paid off by domestic taxation (in that governments can simply take money from their citizens to erode their debts, but the ECB can’t).

I suppose that extra weakening would have helped Eurozone exporters, or even aided consumption of cheaper domestic products, but that might well have been offset by higher imported input costs.

Hmmm, not trivial. I wouldn’t like to be a central banker. :frowning: