David Long


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Forex Market News

From the editors at Bloomberg, comes this piece. A good read so I encourage you to do so.

Audacity doesn’t come easily to the European Central Bank. Its president, Mario Draghi, finally announced a long-awaited program of quantitative easing today. The numbers were bigger than expected, which is good, but the details were shrouded in complexity, which is a pity.

Draghi said the ECB would buy 60 billion euros ($69 billion) a month of public and private euro-area bonds until September of next year. Outright sovereign QE — that is, the purchase of government debt — will begin at last. The implied increase in the central bank’s balance sheet, more than a trillion euros, is more than ECB officials had previously indicated. Draghi was frank, too, about why the ECB was acting. He went into some detail about the increase in deflationary pressure that the new QE program is intended to confront.

That was the right combination: a clear understanding of the nature of the problem and sufficient resolve to attack it. Unfortunately, Draghi then undid some of the benefit by piling on needless complications. These will lessen the program’s impact on inflation expectations — the main channel through which QE is supposed to work.

Draghi said the asset purchases “are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation.” Is that a promise to buy 60 billion euros of assets a month for as long as it takes to raise inflation? If not, is it at least a promise to buy 60 billion euros a month until September of next year? Maybe it’s neither. An “intention” is not a commitment. And if the program was going to be sustained until it raised the inflation rate to the ECB’s target of close to 2 percent, why mention a date at all?

Asked to clarify, Draghi wouldn’t elaborate. Every word in the statement had been carefully chosen, he said. No doubt — and therein lies the problem. The wording was chosen to allow supporters and opponents of QE on the ECB’s governing council to express some measure of agreement. The ambiguity is deliberate, and it makes the program less forceful.

Another complication may prove to be even more damaging. Draghi said that 80 percent of the asset purchases would not be subject to risk-sharing. In other words, they’d be held on the balance sheets of national central banks — German government debt at the Bundesbank, Greek government debt at the Greek central bank, and so on. Presumably, in case of default, national governments rather than the euro system as a whole would be on the hook.

On the face of it, this arrangement — which Germany has reportedly insisted upon — is simply inconsistent with the idea of a single European currency run by a single central bank. It actually seems to envisage a possible breakup of the euro area. Planting the seed of this idea in the minds of investors is remarkably irresponsible.

Draghi is doubtless aware, and tried to undo the damage with a few more carefully chosen words. He said the governing council had agreed unanimously that the policy he was announcing was indeed monetary policy, not fiscal policy — that is, well within the purview of a central bank, not a national government. (This interpretation also avoids a possible legal obstacle and offers some reassurance to German skeptics.) The move, he added, should not be seen as an inducement to expand budget deficits.

That’s all very well — but if it’s monetary policy, why place the assets in the respective national central banks, which is a fiscal arrangement?

For the moment, the contradictions and confusions don’t much matter. The surprising scale of the program is the main thing. Inflation expectations, according to a standard measure, inched up a bit after Draghi had spoken; the euro fell and so did bond yields, all as intended. After long and unforgivable delays, the ECB has finally done it. What a shame that, even now, it will be QE with European characteristics.

The original can be found here.

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