Helicopters are for real disasters

So, everybody and their grandmas are discussing something so absurdly wacko, that just a few years earlier, even mentioning it could very well cost you your professional reputation. But in times of QE and negative rates, the perception of “throwing money off a helicopter” is relatively less crazy. In absolute terms of course, it is still nuts. Continue reading Helicopters are for real disasters

Inflation is inflation is inflation. Or not?

New numbers of the consumer price index sparked again a debate about what monetary policy can do to fight off European deflation and thence the economic glum across the continent. In brief, in February the HICP fell by 0.2 percentage points an an annualised basis. Since the average HICP is the ECB’s preferred gauge for “inflation”, this would suggest further loosening of monetary policy – not to mention that monetary
policy is as loose as it never has been, and this for years. So you may have noticed that I have put the term inflation in quotes, since inflation is something else, but not (really) the change of the HICP. Continue reading Inflation is inflation is inflation. Or not?

A central bank cannot monetise away a liquidity trap

As was expected, today the ECB cut its penalty interest rates on banks’ deposits further into negative territory to 0.4 from 0.3 per cent. Additionally, the ECB also cut its main refinancing operations rate to zero from 0.05 per cent and increased the volume of its QE purchases to 80 billion Euro per month, from 60 billion. As always, the ECB cited sub-par inflation due to slow credit growth as the reason for this policy move.
To my mind, this policy move is merely cosmetic, to keep up the mirage of the ECB’s prowess, where there is actually nothing Frankfurt’s Ostend can do to end Europe’s slump. For years now, Europe is stuck in a liquidity trap. And as we all know, in a situation where the transmission mechanism is broken, more liquidity will not help, that’s why it is called a trap. It seems worth to repeat, that no central bank, no matter how powerful, can monetise away a liquidity trap. Not even the ECB, not even with the fancy, shiny new policy tools of negative rates or QE. Europe’s problem is not liquidity supply, given QE and ultra-low interest, ultra-long provisions, money is everything but scarce. But two features of Europe’s economies make all this supply virtually void.

Continue reading A central bank cannot monetise away a liquidity trap