I’m not sure what markets had already ‘priced in’…but it wasn’t enough. In fact, this could signal the death knell of the QE era.
European Central Bank (ECB) chief Mario Draghi seemingly did everything overnight. But it wasn’t enough. From Bloomberg:
‘The president announced cuts to all three of the ECB’s rates, bringing the deposit rate to minus 0.4 percent, and a 20 billion-euro ($22 billion) expansion of quantitative easing that for the first time opens the door to purchases of corporate bonds. On top of that, he announced a new four-year loan program that potentially allows banks to be remunerated for taking the ECB’s money if they expand credit to the real economy, in a quartet of operations stretching to 2021.’
And the markets said…
The German Dax index tanked 2.3% while the Euro Stoxx 50 index fell 1.5%. It seems like Draghi didn’t do enough. Or talked too tough in the lead up to the decision and had markets positioned far too aggressively.
Whatever the reason, markets were underwhelmed by the ‘do whatever it takes attitude’ of Draghi. It seems as if monetary policy is losing its mojo in Europe.
Europe is having a similar problem to Japan. That is, both want a weaker currency to give their respective economies a boost. But even negative interest rates aren’t making things easy on that front.
Part of the reason for that is the fact that both Europe and Japan have massive savings. Up until about five years ago, Japan ran constant trade surpluses. They produced more than they consumed. This meant that they built up a big pile of savings.
Japan’s ‘net international investment position’ is around US$3.2 trillion. That is, it has net international assets of this size generating an income, much of which converts to yen on a regular basis.
In other words, despite Japan’s economy being in dire straits, its savings from the good decades stand it in good stead now. It’s very hard for a currency to collapse (as so many have predicted for the yen) when a huge wall of international assets stand behind it.
While Europe doesn’t have a positive international investment position like Japan, it does run large trade surpluses, meaning it produces more than it consumes on a regular basis.
This acts as a support for the currency. So both Europe and Japan are up against it when it comes to trying to devalue their currencies meaningfully via monetary policy.
Actually, Japan and Australia make for a good study in contrasts. Everyone thinks Japan’s economy is a basket case and on borrowed time. While that’s true to a certain extent, what they don’t see is that past hard work now supports Japan’s economy.
For much of the 70s and 80s, Japan had the fastest growing economy in the world. Significantly, they saved the fruits of their labour. They saved enough to support a profligate and corrupt government (by helping to finance the largest government debt in the world) AND to build a US$3.2 trillion pile of net international assets, which generate dividends and income for the country.
Although Japan has an ageing society, it will take many years to run down their pile of savings.
Now, compare that with Australia. On the surface our economy is the envy of the western world. 25 years without a recession! However, we’ve done it on borrowed money.
Unlike Japan, we haven’t saved a penny and we’ve just gone through the biggest commodity boom in history.
Our net international investment position stood at a deficit of $950 billion at the end of December. By the middle of the year, it will hit $1 trillion. In other words, we have no savings to protect us when the inevitable slowdown comes.
A lot of people think that our world class superannuation system means our saving levels are high. But the above deficit takes into account all the money pumped into superannuation.
The problem is that our love for debt-fuelled property overwhelms our superannuation ‘savings’. We borrow heavily from overseas to satisfy our demand for housing loans. And we have to pay interest on these loans. This is why Australia runs a constant current account deficit. The interest bill on our net debt is massive. We’re spending around $45 billion per year servicing our net debt.
Yet you never hear about this. You only hear complaints about the government spending and the interest bill on government debt.
I’m sorry, but government debt isn’t Australia’s biggest problem. It’s private debt, invested in land, which provides little to no productivity benefits.
Despite this well acknowledged fact, there’s been a storm of lies and misinformation about tax reform designed to increase productivity in this country and direct capital away from chasing a land boom.
For The Daily Reckoning