Are Central Bankers delusional?
Over the weekend, Benoît Cœuré, Member of the Executive Board of the ECB, penned a piece defending the ECB’s policies from the criticism that NIRP hurts savers.
The first paragraph reveals, quite clearly, just how lost the ECB is regarding the efficacy of its policies.
Is the ECB stubborn because we are adhering to our monetary policy despite strong criticism? No. We are complying with a precise task that was conferred on us. The EU treaties gave the ECB a narrow price stability mandate. In 2003 the ECB’s Governing Council clarified that euro area inflation should be below, but close to, 2% over the medium term.
If this is the alleged mandate for the ECB, they might want to reconsider their current policies. As we noted over the weekend, four rounds of NIRP as well as over €600 billion in QE has yet to even achieve 0% inflation.
NIRP and QE began post-2013 after the EU banking crisis hit full force in 2012. Looking at the above chart, where can you see any significant uptick in inflation from the EBC’s policies?
The single largest move, trough to peak, occurred from January 2015 to May 2015 when inflation rose from -0.6% to 0.3%, or a move of 0.9%. This occurred when the ECB announced its first QE program in history.
So… implementing a €1 trillion QE program, which for years was considered the “nuclear” option for the EU, produced a 0.9% increase in inflation that lasted a total of five months.
This is the greatest success the EU has managed to achieve despite implementing some of the most extraordinary monetary policies in history… a less than 1% increase in inflation that lasted less than half of a year.
Meanwhile, the ECB has implemented four rounds of NIRP, which does in fact hurt savers a great deal. In simple terms, while the ECB pursues its monetary pipe dream based on hypotheticals (economic models imply inflation should rise based on NIRP), it ignores economic realities.
What are those realities?
NIRP is not inflationary. On the contrary it is highly DE-flationary.
As Mr. Couere himself notes in his op-ed piece “people are not only savers.” The problem with this statement, is that while emphasizing people are more than economic units, he fails to see how actual people react psychologically to the ECB’s policies.
NIRP is both a tax on future interest income as well as a tax on current capital. It is a terrifying prospect for anyone as it indicates that you are very likely going to lose money.
Basic human psychology reveals that people are more afraid of losing what they already have, that they are of gaining something they don’t have. NIRP guarantees the former.
The likelihood of anyone experiencing NIRP and believing that the solution is to pile into risk assets (where the possibility of even greater losses of capital are plentiful) is less than 1%.
This is particularly true when most EU stocks peaked in 2014 around the time the EBC first introduced NIRP.
EU stocks are not a safe bet post-NIRP. And why would any saver buy EU sovereign bonds when most have negative yields? If your deposits are already going to be charged based on NIRP, buying an EU sovereign bond which also charges your interest accomplishes nothing but increasing your volatility.
Who would want that?
At the end of the day, the ECB, like all Central Banks, is concerned with one thing: the bond bubble.
And with the EU sporting a Debt to GDP ration of over 90% as a whole, the EU itself is bankrupt. Four rounds of NIRP and €1 trillion in QE can’t fix this.
Eventually this will trigger another 2008 type event. When, no one can say, but given that the ECB has failed to generate significant inflation, and that most EU nations have seen their Debt to GDP ratios increase since 2012, it’s not far off.
The next Crisis is just around the corner. And it will make 2012 look like a joke.