There are “portfolio effects” for individual investors, bank balance sheets and even interbank tendencies, or at least that is according to central bankers. The rather tame ECB announcement this week did highlight and clarify what Mario Draghi and his euro monetarists wish to accomplish.
The new measures will support specific market segments that play a key role in the financing of the economy. They will thereby further enhance the functioning of the monetary policy transmission mechanism, facilitate credit provision to the broad economy and generate positive spillovers to other markets. Taking into account the overall subdued outlook for inflation, the weakening in the euro area’s growth momentum over the recent past and the continued subdued monetary and credit dynamics, our asset purchases should ease the monetary policy stance more broadly.
Unfortunately, the very same sentiment has been expressed throughout the “extraordinary measures” tenure, even predating Mr. Draghi. Going back to the first press conference announcing the LTRO’s way back on December 8, 2011 (a date that should figure far more prominently for what is rumored to almost have occurred), Draghi said basically the same thing:
In its continued efforts to support the liquidity situation of euro area banks, and following the coordinated central bank action on 30 November 2011 to provide liquidity to the global financial system, the Governing Council today also decided to adopt further non-standard measures. These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations.
In other words, all this monetary focus is intended to provide liquidity to banks so that they will lend to Europeans so that the economy can grow and inflation can stay at that debasing 2% target. This “easing of the monetary stance” has been unending, to no “spillover” effect thus far. Inflation has been totally undisturbed by anything and everything the ECB has done, as is, unfortunately lending. The only positive aspect of that is low price redistribution makes the economic dysfunction actually more bearable – imagine the utter disaster had prices in Europe followed Japan’s “desires.”
Central banks want to express their exasperation in the term “clogged monetary transmission channels” but in reality it is simply that the theory is flawed from its basic start. Again, this goes back to ages ago when the idea of economy and markets under this Keynesian/monetarist framework decided everything to do with a real economy has a monetary component. Thus, a bank panic is disastrous to the economy for its effects on money and credit – remove the bank panic or liquidity problems and the economy, to the orthodox understanding, should spring to life.
Europe, as in Japan and the US, shows that is simply not the case. Furthermore, you can make the connection between the lack of consumer inflation (though a positive) and economic growth with the very opposite reaction of asset prices. The more heavy the intrusion, or “portfolio effects” among other factors including psychology, the less the economy functions of its own.
That may suggest an tangible detraction of asset inflation from the real economy, which actually makes sense given orientation of expectations toward “easy money” and away from the apparent undesirability of lending to actual Europeans and their small and medium businesses.
That theoretical short-coming still seems to be gaining in European credit markets where flattening continues at a determined pace. The apparent optimism that sparked a retracing steepening in earlier September has been left with no trace, as curves are at or flatter than the most dramatic points in late August. When credit markets stop listening to the ECB altogether then the liquidity theory will have no bearing whatsoever.
Unfortunately, that raises the prospects not for starting over with something else, like a market approach with actual positive possibilities, but rather with the big Abenomics-type inflation shock; we can only hope the ECB is forced to face up with the very stark disconnect between liquidity, lending and economy before being “allowed” to further impoverish Europe in the desperate manner of Japan. That is where this will all ultimately head, as the answer to every orthodox failure (batting the inverse 1.000 so far on every continent) is always more and bigger.
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