ECB President Mario Draghi has said the European Central Bank will finally start its full-scale quantitative-easing (QE) program, or as I call it, the "European Money helicopter program."
This plan, in my opinion, is too big and too late.
The ECB will continue purchasing asset-backed securities and covered bonds that was started last year. All these buying programs combined will be executed on a monthly basis for a total monthly amount of 60 billion euros, or about $65.9 billion.
The ECB has the intention to perform this buying program until the end of September of next year and that will, as Mr. Draghi said himself: “… in any case, be conducted until we (ECB) see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 percent over the medium term.”
For long term investors, ECB’s intention to continue its full scale QE until inflation rates in the eurozone come close to, but remain below, 2 percent, is really very important because that ECB rule gives as a hint “how long” the full EU QE could go on, which could well be beyond September 2016.
Let me explain. To bring “inflation rates below, but close to, 2 percent” in context, while Mr. Draghi’s says at the same press conference:
“… March 2015 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.0 percent in 2015, 1.5 percent in 2016 and 1.8 percent in 2017 …” says a lot.
There is a possibility the full scale ECB QE program could go on well into 2017 as the ECB itself expects inflation in 2016 only to come in at 1.5 percent, which is of course not close to 2 percent.
During the relatively enlightening press conference
Mr. Draghi repeated several times the ECB is a “rules-based institution,” which means the ECB’s primary objective of its monetary policy that is to maintain price stability whereby it aims at inflation rates of below, but close to 2 percent over the medium term, will be applied to the letter.
I don’t want to be pessimistic, but realism obliges me here, sticking to its own rules could in the end become a deadly trap for the Eurozone as a whole if inflation doesn’t rise.
Because of the full scale QE, long-term investors could expect a further weakening of the euro that probably will reach parity with the dollar in a not so far future and that could even move lower over time to the 80 dollar cents per eurozone.
Please keep in mind, in October 2010 the euro reached a low of about $0.82 per euro.
ECB President Mr. Draghi has definitively confirmed the continuous downward path of the euro.
From where the euro quotes today against the dollar (about $1.10 per euro) and a e.g. more or less $0.80 per euro, this would represent a further substantial drop in the value of the euro of about 27 percent, which any long-term investor who has euro denominated investments could do well calculating such a move in, notwithstanding such a move is not written in stone.
I’d like to add here, it’s obvious markets haven’t yet fully priced in the impact of a full ECB quantitative easing program that could stretch well beyond September 2016.
Finally, it remains to be seen if the ECB will as planned win its battle against too low inflation. When in the 1970s it was nearly impossible to fight inflation, why would it now be easier to fight too-low-inflation?
Also, and in the context of the long-term investor, let’s not fool ourselves with there is “good” too-low-inflation, let alone deflation thanks to low oil prices or rising productivity that should help raise incomes and spending, because there isn’t!
When we look at the huge quantitative easing (QE) programs the Federal Reserve has undertaken, everybody must admit decent wage improvements are still not there.
Everything will take much more time than initially planned. Yes, QE has made asset prices going up while it has lowered the value of the currencies there where QE was applied, but all the running QE programs in the dominating economies of the world have not been able to stop worldwide falling prices.
It’s not an overstatement to say: “Houston, we have a problem!”
In today’s new economic world order (seems more like disorder), nobody knows how this all will end up and who will pay for all the collateral damage the “QE-steroid era” will have caused.
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: Hans Parisis
Hans Parisis is a regular contributor to the Financial Intelligence Report. To join the Financial Intelligence Report, click here. Click Here to read more of his articles.
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