As expected, both the Bank of England and the European Central Bank maintained present policies and choice to wait until the economic situation became clearer. The BOE was boring as the decision was announced and Mervyn King does not hold a post-meeting press conference. While the ECB held rates at 0.75% and this time it was unanimous, the Draghi press conference was entertaining. I must admit that the caliber of questioning by the European press is of a far higher quality than American journalists interviewing Chairman Bernanke. Last night I mentioned that for this scribbler, the issues of competitive currency devaluation and the idea of targeting economic thresholds were going to be the most significant opinions possibly offered by President Draghi.
Midway through the press conference, an unidentified journalist posed those questions to Draghi–must be a reader of NOTES FROM UNDERGROUND. The first question was directed at the possibility of the ECB targeting the high unemployment rate presently plaguing the EU by being very aggressive in monetary accommodation. Draghi reiterated that unlike the FED the ECB does not have a dual mandate but rather a single focus on prices. Draghi was quick to add that high unemployment can drive prices lower than the ECB may find desirable and thus the ECB mandate can be used to stop a deflationary spiral. It does call the question of how the FED can be so bothered by a 7.9% unemployment but the ECB is very casual with a rate of almost 12%.
The second question was directed at the aggressive currency intervention being waged by the Japanese, Swiss, Brazilian and U.S. central banks. President Draghi retorted that there was no currency interventions because at previous G-20 meetings the world’s largest economies “solemnly agreed to allow market determined currency levels” and that nobody is in a game of competitive devaluation. Draghi followed that up with the a classic economists response: THE EURO IS PRESENTLY AT ITS LONG-TERM AVERAGE. This response is of no value for a EURO at 1.32 and EURO unemployment at 7.8% is far different from a EURO at 1.32 and 12% unemployment. Every value is much more important to its time than a mere average of long-term value. The result of the fiscal crisis in the U.S. gave ECB PRESIDENT Draghi the ability to tap dance around the critical issues–Spanish Unemployment at 26%–no problem. Singing and dancing while its raining liquidity. Don’t worry, be happy.
January 11, 2013 at 12:36 am |
I agree with your analysis. Somewhat unrelated to your post, there are two issues about the Euopean situation that I don’t understand. First, it seems that other than the cram down of Greek debt and the steady improvement of the Irish economy very little has been accomplished. Notwithstanding the very painful conditions in the various countries, almost no hard structural decisions have been made or if made they have not been implemented. The second issue concerns the various actions taken by the ECB, the various governing bodies, ESFS, and/or the ESM. When any of the entities make financial commitments they are in theory pro rated to the various countries, however since except for Germany, Netherlands, Finland, and Austria all the other countries are bankrupt, I fail to see any improvement in the last two or three years. It appears to be an even bigger Ponzi/Madoff scheme than our Fed and Treasury are running. I realize they are all trying to avoid the reality, but I cannot figure out when/how the charade will be exposed. I guess it is obvious that if it were easy the whole house of cards would have already fallen.
By the way I will be ordering the book tomorrow.
Thanks,
Sam
January 11, 2013 at 7:55 am |
Sam–nobody does but right now the focus is on others and as Draghi has mitigated the near term pain.Eur/yen,Eur,gbp,are all putting a bid to the EURO and chasing the shorts out.The SNB and BOJ policies are also driving a bid into the Euro—with all the noise in the U.S. markets are grabbing Euros but all your points are valid but in a global zero interest rate environment we are always adjusting—remember trading and investing demands a dynamic analysis and not simply static model type analysis–you will definitely understand the EU in a different and deeper viewpoint after reading the rotten heart.