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Thursday, June 5, 2014

ECB Panics, Assumes That Will Help

The European Central Bank (ECB) cut its deposit rate to -0.10% today. My view is that this is a policy error - the central bank is underlining that the situation is bad, and it is being forced to contemplate crazy policies. That is certainly not going to help the Confidence Fairy return to the European real economy.

Some other scattered observations:

  • I doubt that this will have any measurable effect on the economy. If there's an effect, it would be via a weakening of the euro exchange rate. Since I do not see the developed economies as being very sensitive to exchange rates, this would not be enough to move the needle on growth. The euro has swung around in a wide range since 2010, but the economy has largely remained stuck in an austerity-driven swamp.
  • This will generate work for people who have to comb through their fixed income pricing code, to see whether they embedded floors at 0% since negative interest rates "are impossible".
  • This will provide another excuse for gold bugs to rant about fiat currency, and another reason for stock market bulls to justify why stocks are going to go up. Since both groups were going to do that anyway, it just means that anyone who reads about financial markets will have to slog through more of the same largely copy-and-pasted articles.
  • This will not be enough for Euro area residents to disintermediate their somewhat shaky banking systems by withdrawing cash. But the possibility of that happening should be enough to keep the ECB from pushing this experiment in negative rates too far.
  • Tying into my previous article which tangentially touches on "Neo-Fisherism" (the concept is discussed in the articles I link to there), one could ask why imposing a new tax on banks is going to be stimulative?
(c) Brian Romanchuk 2014

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