Submitted by Jeffrey Snider – Alhambra Investment Partners
I don’t think Mario Draghi panicked, but China is as good a scapegoat as any at the moment. The ECB’s intended adjustment in the PSPP (QE) is cosmetic, but then again QE itself is pretty much only that to begin with. It seems pretty obvious given thedesperate lack of any positive impact from it so far, and the very large, gathering “unexpected” downside, the ECB decided to make some small change to at least give “markets” something.
The reason for that seems to lie in the lie of orthodox “stimulus” as it is practiced in the Japanese versions of late. In other words, the Europeans are counting on the euro almost as if they have finally seen that internal dynamics will never respond to raw monetarism. The ECB’s staff projections in this September update are at odds with themselves, none more so than in the overall guiding assumptions:
While the expected growth in advanced economies remains broadly unchanged compared with the June 2015 projections, the outlook for activity and imports in major emerging market economies has been revised down substantially. Accordingly, euro area foreign demand is projected to pick up at a noticeably weaker pace than entailed in the June 2015 projections. However, the past depreciation of the euro is still expected to exert a favourable impact on euro area export growth.
“Advanced economies” include Europe and the US only as a matter of the “transitory” inflation problems that are stubbornly unrelenting. In June, the ECB projected $63.8 per barrel for 2015 crude oil and $71 for 2016. This latest projection now sees $55 and $56, respectively – and these latest guesses, for all these statistics, not just oil, were compiled prior to the “dollar” breaking the PBOC on August 11.
That has left European “inflation” projections back to zero but more notably a downgrade in 2016; from 1.5% in the June update to just 1.1% (and from 0.3% for 2015 back to 0.1%). While that would seem to suggest QE’s effects aren’t estimated as remarkable, the ECB staff only reduced real GDP estimates by 0.1% in 2015 and 0.2% in 2016. Therefore, they expect the internal economy apart from “inflation” as if it weren’t a full part of what is affecting oil prices; nominal GDP is reduced 0.2% or so but real GDP only 0.1% in 2015, 0.4% in 2016 nominal but just 0.2% in real GDP.
The difference there, it would seem, would be these ideas that a weaker euro will have a favorable and larger impact going forward to offset some of the inability of QE to work more directly through internal “inflation.” That, I believe, explains the adjustment to the PSPP guidelines as if they felt necessary to do something to keep the euro weaker lest it remove the only possible support left.
While the ECB and every other orthodox expression will blame China for this, and its additions to variations for emerging markets in general, that is obvious misdirection since China’s problems stem from Europe and the US but also, more importantly, QE was supposed to be extremely potent on its own regardless of foreign or indirect factors. It was never proclaimed to be chiefly a currency means. If that is all that is left of its past charm, trouble indeed:
The European Central Bank cut its inflation and growth forecasts for the euro zone on Thursday and its president said things could get worse.
The euro fell 1 percent on the moves and comments, hitting a two week low.
Mario Draghi, the ECB president, pledged to beef up or prolong the bank’s bond-buying program if the picture indeed darkened further, although he said no one on the bank’s Governing Council had argued for it now.
The ECB, which left interest rates unchanged in a widely predicted decision, said the chances of missing its medium-term inflation target had increased due to lower oil prices, weaker growth in China and other emerging markets and an appreciating euro. [emphasis added]
As always, though Draghi assured everyone that these problems were due to “transitory effects” the word is losing its meaning. If transitory applies to dragging expected inflation down for an extent of at least two years, then that is simply the wrong word especially as “market” views on “inflation” are sinking once more aligned not with QE but oil. That implies, outside of a radical shift in condition three months on, these “inflation” and economy downgrades aren’t over and the end of transitory as denying the more serious reality.
In the bigger picture, it is clear that Europe’s central bankers are finding out what America’s have already feared, that QE itself just doesn’t work. It was instituted this year in Europe because the ECB had already, contrary to media narratives, tried everything else that it could possibly dream up – to no avail. The world is overflowing with “demand” stimulus but almost no marginal demand at all, which is what the confluence of the “dollar” and oil prices project and confirm. The reasons for that are startlingly simple, as instability is a terrible foundation for honest trade.
Orthodox economics admits that these liquidity measures might themselves be an introduction of artificial instability, but that such intrusiveness is “transitory” as a necessary cost or burden in order to ignite full economic growth (thus, as noted yesterday, a risk/reward expectation so far met with only the former). But it is much more than that, as even its own planned objectives are themselves contrary to actual economic sufficiency.
Take oil prices themselves, as on the one hand central banks appeal to them (reluctantly, which is an important clue) as if they are some sort of stimulus for consumers but then the very next decry the price effects on their inflation plans. Put those pieces together and you see monetarism for what it truly is, namely that central banks do not in any way actually want lower oil prices; and certainly not to the great and sustained extent seen “unexpectedly” of late. Instead, Europe’s QE is as much an antagonism against low oil prices in favor of “inflation” driven exclusively by credit and bank growth! Enjoy those energy prices while you can because your local central bank is desperately trying to offset them by something else rising equally and intensely profound.
And if that effort were to be successful, including actual economic gains outside of some myriad of slightly positive numbers, the ECB would act against rising wages as if that were “too” inflationary. In other words, by the construction of orthodox theory, all the factors that would actually benefit the economy, low energy or commodity prices as well as rapidly and robustly rising wages, are declared unhelpful to be actively countered by continued and massive financial controls. There truly is no mystery as to why monetarism cannot deliver – it is, even in theory, its own worst enemy.
What really has happened is ever more simple and in many ways merciful. QE in Europe, as the US and Japan, is shut out of more broad redistribution channels by the global monetary system’s continued decline. Banks will not participate in the direct credit channels, such as private mortgages as before, but will instead look to the price inflation aspects bringing solely that unhelpful outlet which is hugely inefficient in terms of aiding marginal expansion in the real economy. The results are great and growing asset price imbalance (risk) with very little economic gain (reward), the continual singular expression of voodoo.
In that state, the people of Europe are quite lucky that oil prices might be some minor benefit to the malaise, as the last thing they should wish is the monetary system turned as the central bank should want, such as Brazil. Some great good the “dollar” run has done Brazil as a means of currency “stimulus”, as both exports are crashing as well as consumer prices skyrocketing quite a lot apart from orthodox theory. That is the real truth of monetarism, as even when central banks get what they want there is no accounting for the lack of control in the real world as desperately apart from the theory. Again, the great lie is that you can use instability to create stability, a philosophical foundation premised upon grand oversimplification. It just doesn’t work that way on any level or in any format since complexity is beyond quantification and maybe itself the chief economic factor (dynamism).