Today was a depressing day. I wrote a post that I had intended to post yesterday. But I got busy with work and had to let it pretty much expire. But here it is anyway:
There isn’t going to be a lot of substance to this post, unless one might believe that I am in possession of a functional crystal ball.
I don’t have one of those. But it probably doesn’t take one to figure out that the ECB will probably do nothing substantial compared to the enormity of the problem of loss of the nominal anchor in the downward direction. Without the resolve of Kuroda, who even despite his own resolve is falling short, the ECB can expect to do only some fraction as well with some governors willing to go as far as to try to peddle the notion of creating negative supply shocks to avoid the price level sinking farther and others supporting the idea of QE via abstention. Perhaps what is really needed at the ECB is a batch of someone-else(s), or ultimately a change in EU governance that makes it possible for the EZ to get the change in monetary policy governance that is required to turn that ship around. You can’t send hawks however seemingly reformed they may be to do the job of doves.
How do I know this? Well, a habitual hawkish publication, the Wall Street Journal published today a listing of 5 things to know for the ECB’s meeting tomorrow. Among the list is three forms of QE, differentiated by assets purchased. The list of course drew at least a snicker when I read it because it doesn’t really matter what assets are purchased for it to be essentially QE. The title, 5 Things to Look Out for at Thursday’s ECB Meeting, is kind of funny too… the term “Look out for” generally coveys something dangerous. And in the minds of hawks, hitting the “PRINT” button is always and everywhere wrought with danger regardless of any misery monetary deflation induces.
They seem to like the idea of the ECB buying asset-backed securities or some mix of those and corporate bonds as opposed to government bonds, labeling the latter with that troublesome moniker of QE, while the former is somehow not QE. What it is, they don’t say.
I get a kick out of this because this appears to convey that if these hawks have to tolerate the printing of money for asset purchases, they would rather it be of the corporatist flavor that allows the ECB to play in the game of allocating credit to private parties – even after having beaten the bubble drum until it broke, that neither banks nor private investors can do appropriate things with money so they shouldn’t have any. I am not really sure if they even know what they are saying.
At any rate, I don’t believe the hawks will be disappointed by the outcome of the ECB meeting tomorrow. I might be crawling out on a limb. I certainly hope to be proven so incorrect that I have to eat a huge helping of crow for dinner tomorrow night. But I really don’t think that the ECB will rise to the occasion so to speak, because I’ve done enough reading about hopes that the four-year loan program to banks will do something without so much as a hint that maybe that loan program has already been priced in. What we’re looking at right now is the market forecast of that program, and without it the deflationary pressure might have even been greater. And the term of four years gives the ECB that long to dither, an activity that appears to be among its core competency.
I hate to say it. I really do. But the EZ is headed to Japan on the express train. The only question is the duration of the trip.