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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.
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