It seems that Mario Draghi has taken the stance that he can hold off doing any further QUANTITATIVE EASING (QE) as he waits for the policies of the British, Japanese and the U.S. to generate enough growth to allow Europe to muddle through its problems for the next few years. President Draghi seems to believe that if the global economy can achieve a growth rate of 4% or more it will buy time for Europe to begin to correct some of its problems and at least put a halt to its economic downturn. The ECB has accepted the slide in the YEN in the hope that stimulating Japanese growth will alleviate some of the stress of the global economy. The Japanese economy has been a laggard for the last two decades, give or take a year here or there, and it was able to muddle though based on the growth of the rest of the world.
Since Draghi raised the issue of “doing whatever it takes,” the EURO and European debt markets have rallied without any real action on the part of the ECB. So much so that some of the previous QE, the LTRO money, has been repaid removing some of the stimulus. The ECB wants to hold its powder for in case of a political situation that actually forces President Draghi to undertake an Outright Monetary Transaction (OMT). The German elections are scheduled for September and if the EU can muddle through this period and not be forced into any drastic action, it will keep the Bundesbank hard money crowd from attacking Chancellor Merkel. If Europe is to attempt a genuine effort at resolving its present malaise, it will need Frau Merkel at the helm in Germany.
As the ECB meets on Thursday, some analysts are predicting that Draghi will push some type of rate cut in order to weaken the EURO. From my perspective Draghi seems content to wait. He will need to see some resolution on the Italian election and being that the Italian and Spanish debt markets have steadied, there’s no need to rush into action. Reuters reported that European auto sales have softened again as registrations fell 8.5% in Germany, 12% in france and 17% in Italy. This is not new and pales in comparison to the problem of rising unemployment. If the world is willing to keep the European bond market steady and the euro on hold then there is no cause to irritate Bundesbank President Jens Weidmann. Let the rest of the world do the heavy lifting.
The world is not in a risk-on, risk-off paradigm as the equity markets rally even with a stronger U.S. dollar. Yes, Mario:
Time is on your side,yes it isNow you can always sayThat you want to be freeBut you’ll come running backYou’ll come running backYou’ll come running back to me
Tags: BOC, BOJ, ECB, Euro, Mario Draghi, OMT, quantitative easing, Yen
March 5, 2013 at 10:33 pm |
Yra,
I always enjoy, appreciate, and learn from your articles. FYI I have finished the book you sent. My simple evaluation of the book was that any rules/laws the EU and its various sub entities make or have made do not really mean anything. Rules/treaties are routinely ignored and so the EU runs on some sort of seat of the pants short term response mechanism. I still don’t see how they get out of their situation.
Totally unrelated to your article and my comments above, I have another issue that I have not seen discussed. Everyone seems to assume that we are in this “New Normal” go slow muddle along world economy and that with all the central bank liquidity will eventually allow us at some point to return to a more normal higher growth rate and all will be well with the world. My question is “What if this is wrong?” Just suppose as a possibility that the people of China realize they have purchased $7+TRILLION of empty unused stranded assets (not counting commercial and industrial) homes in a $8 Trillion GDP economy. If this comes into realization the world economy probably would seize up. What could the Fed possibly do to counter act this problem in its current weakened state?
Thanks for listening, probably to much to respond.
Samuel A Lincoln III (Sam)
Cell # 801.860.4944
March 6, 2013 at 8:46 am |
Yra,
Excellent as usual, especially the channeling of “Time is on my side”. Combining Draghi, Bernanke, and Abe, with the housing “boom” in China, I’d suggest “Central Planners” globally may be channeling another old favorite. Consider Emerson, Lake & Palmer’s “Karn Evil 9″. In part, I quote:
” Welcome back my friends to the show that never ends
We’re so glad you could attend Come inside! Come inside!
There behind a glass is a real blade of grass
Be careful as you pass.
Move along! Move along!
Come inside, the show’s about to start
Guaranteed to blow your head apart
Rest assured you’ll get your money’s worth
The greatest show in Heaven, Hell or Earth.
You’ve got to see the show, it’s a dynamo.
You’ve got to see the show, it’s rock and roll ….
Right before your eyes, we pull laughter from the skies
And he laughs until he cries, then he dies, then he dies
Come inside the show’s about to start, guaranteed to blow your head apart
You’ve got to see the show, it’s a dynamo
You’ve got to see the show, it’s rock and roll…
Soon the Gypsy Queen in a glaze of Vaseline
Will perform on guillotine
What a scene! What a scene!
Next upon the stand will you please extend a hand
To Alexander’s Ragtime Band
Dixieland, Dixieland!
Roll up! Roll up! Roll up!
See the show!
Performing on a stool we’ve a sight to make you drool
Seven virgins and a mule
Keep it cool. Keep it cool.
We would like it to be known the exhibits that were shown
Were exclusively our own,
All our own. All our own.
Come and see the show! Come and see the show! Come and see the show!
See the show!
I’ll leave it to you to assign names to the seven virgins!
Kevin
March 6, 2013 at 9:06 am |
Kevin—I should have banked with you all this years.Can’t beat a bank/professor citing one of ELP’s great ones
March 6, 2013 at 11:23 am |
Simon–you ask the penultimate question.But the talmudic response would be another question—Would it be in China’sb est interests to take that route are just accept the global game as it is and hope that they can continue on the growth path they have been on and at some point be in a better position to counter the terrible policies of the U.S. at this point.This question was posed to Lee Kuan Yew in the new book by Graham Allison.