ECB Cuts Rates from Almost Nada to Nearly Zilch - WE’RE SAVED!

ECB Cuts Rates from Almost Nada to Nearly Zilch – WE’RE SAVED!

Courtesy of Pater Tenebrarum of Acting Man

Bold Super-Mario Strikes Deflation Bogey Down

Mario Draghi managed to surprise even us, although we are usually in the camp that argues that central bankers all over the show tend to err on the side of easy money. The ECB cuts its repo rate (as indicated in the title to this post) from almost nothing (0.5%) to nearly zilch (0.25%), in what was widely seen as a 'surprise strike'. Interestingly, the markets that usually benefit from such action reversed course almost immediately, leaving ugly looking daily candle sticks behind in the process. Judging from the commentary in the press it is all about the euro zone joining the 'currency war' and fighting the deflation bogey. Reuters reports:

“The European Central Bank cut interest rates to a record low on Thursday and said it could take them lower still to prevent the euro zone's recovery from stalling as inflation tumbles.

[…]

Underlining its support for the euro zone, the ECB said it would prime banks with as much liquidity as required until mid-2015. A Reuters poll of economists also saw the ECB offering banks a new round of cheap money within six months.

The 23-man Governing Council had faced intense pressure to act after a shock slump in euro zone inflation to 0.7 percent in October, far below the ECB target of just under 2 percent. The ECB cut its main refinancing rate by 25 basis points to 0.25 percent. It held the rate it pays on bank deposits at zero and cut its emergency borrowing rate to 0.75 percent from 1.00 percent. Draghi stressed the ECB still had room to act if needed.

"We have a whole range of instruments to activate before reaching the lower bound … in principle we could even cut further the interest rate," he told a news conference. "We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to 2 percent later on."

Draghi said there was general agreement on the need to act but differences over when to act, with a "considerable majority" on the Governing Council seeing sufficient evidence of protracted low inflation to cut at Thursday's meeting. A source familiar with the discussions told Reuters that around a quarter of the Council members, led by Bundesbank chief Jens Weidmann, spoke out against a cut this month.

The International Monetary Fund and governments from across the euro zone welcomed the reduction in rates.

Italian Prime Minister Enrico Letta said the cut showed "the ECB cares about growth and competitiveness in Europe" and that it would allow a "rebalancing" of the euro-dollar rate. The finance ministers of France and Ireland echoed that sentiment. Euro policymakers have played down the threat of Japan-style deflation, which led to a "lost decade" there, but appear to be taking no chances.

All but one of the 23 money market traders polled by Reuters this week expected the ECB to keep rates on hold at Thursday's meeting, pending a clearer view about where euro zone inflation is heading.

Draghi stressed that the ECB still had an "easing bias" to its policy stance. By contrast, many economists expect the U.S. Federal Reserve to begin withdrawing stimulus next year. "This will give European exporters much-needed breathing space, with the euro currency finally falling back," David Thebault, head of quantitative sales trading at Global Equities in Paris, said of the cut.”

So how big a 'deflation threat' is the euro area facing? It is apparently widely assumed that the slight decline in the rate at which consumer prices continue to rise constitutes evidence of deflation (prices are indeed mildly declining in several peripheral countries, keeping the caveat in mind that the 'general price level' doesn't exist and is therefore not really measurable).

Here is a chart of euro area money TMS (currency and overnight deposits):

Euro area TMS – does that look like 'deflation' to anyone? Since the euro was introduced in 2000, the euro area's money supply has increased by 168%. If that is deflation, we'd hate to see what 'inflation' looks like – click to enlarge.

CNN Money incidentally also reported that 'ECB Cuts Rates to Ward Off Deflation Risk'. Amid all this terrible deflation, energy and heating bills are soaring across the continent, as it turns out that funding the 'green energy' scam doesn't exactly come cheap. Households of modest income may no longer be able to adequately heat their homes if a harsh winter strikes. We hope they will be warmed by the thought that they are helping to 'save the planet'.

Devaluing Oneself to Prosperity

Meanwhile, weakening the euro may help increase what is already a record euro area trade surplus, but the problem is of course that not everybody can devalue their currency against everybody else at the same time. An even greater problem is that one simply cannot devalue oneself to prosperity. If that were possible, Argentina and Venezuela would be the envy of the world right now. For some strange reason Venezuela is better known for its recurring toilet paper shortages than its riches at the moment.

Lastly, we notice that the Fed 'taper' nonsense is once again mentioned in the Reuters article. There is zero evidence at the moment that the Fed will reduce its monetary pumping. We wonder how long it will take before people realize that. They have been talking about the mythical 'exit' since 2009!

As noted above, European stock markets meanwhile seemed not to realize that we are now saved:

Not going to plan: the Euro-Stoxx 50 Index daily: after initially rising to a new high on the ECB rate cut news, it closed with significant losses, leaving behind what looks like a very ugly reversal candle- click to enlarge.

Ambrose Evans-Pritchard has predictably also recently called for a devaluation of the euro, and based on a study by Deutsche Bank, he even seems to know down to the cent what euro-dollar rate various countries in the euro area 'need'! He also quotes France's 'industrial renewal' clown Mountebank approvingly, who in turn seems to know exactly 'how many jobs France loses for every 10 percent rise in the euro'. Mountebank for some reason failed to mention that the taxation and regulation policies of France's socialist government are actually the main reasons for France's dismal economic performance.

“Every 10 per cent rise in the euro costs France 15,000 jobs. Britain, the US, Japan, all have a strategy of monetary stimulus, but in the EU we have nothing but hard money. The currency doesn’t belong to bankers, and it doesn’t belong to Germany, it belongs to all members of the eurozone,” Mr Montebourg said.

A Deutsche Bank study said the euro “pain threshold” for Germany is $1.79. It is $1.24 for France, and $1.17 for Italy. It ended last week at $1.35 to the dollar. This means Germany is sitting pretty, and it dominates the policy machinery. Meanwhile, Italy screams with pain, its industrial output still 26 per cent below its 2008 peak. Italy’s EU commissioner, Antonio Tajani, warns of “a systemic industrial massacre”.

As Japan's citizens have just found out, devaluing oneself to prosperity unfortunately entails the systematic impoverishment of the population. As noted in a recent article at Zerohedge, Japan is about to become a 'nation of beggars':

“Once upon a time, a few deluded individuals held hope that quantiative easing may actually do something to improve the plight of the common person instead of simply transferring wealth from the poor to the rich at an ever faster pace. Five years of failed monetary policy later, which has done nothing to stimulate the economy and everything to stimulate unprecedented non-risk taking that makes even the epic asset bubble of 2007 pale by comparison, this naive assumption has been thoroughly destroyed. However, for all those who don't splurge on yachts, mega mansions, and private jets, the pain is just starting. The latest evidence of this comes from Japan where according to a survey by the Bank of Japan released today, the share of Japanese households with no financial assets rose to a record as falling incomes forced people to dig into their savings.

According to Bloomberg , as a result of Abe's disastrous "reflation at all costs" policies, the proportion of Japanese households without financial assets reached 31 percent up from 26 percent a year earlier and the highest since the poll began in 1963.”

According to AEP and other members of the ever larger pro-devaluation and pro-inflation chorus, the ECB should ensure that Europe emulates this roaring 'success'. We have little doubt after yesterday that Mario Draghi will oblige.

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