That Don’t Impress Me Much

That Don’t Impress Me Much

over 4 years ago3 mins

🕰️ Recap

  • At Mario Draghi’s penultimate meeting as governor on Thursday, the ECB announced a cut to interest rates and a new program of bond purchases. > Read our story
  • The bond purchases faced opposition from, among others, Germany and France – the eurozone’s largest economies. > Read more
  • Across the Atlantic, the Federal Reserve (the Fed) is expected to cut US interest rates again when it meets next week. > Recap its last meeting
  • Meanwhile, the Bank of Japan, which also meets next week, isn’t forecast to pump the gas just yet – but it may be forced to join the party if a slowing global economy pushes investors to snap up the yen. Read more

🔗Connecting The Dots

In the decade since the financial crisis, you’ve probably heard a lot about central banks buying bonds to spur growth 🌱 This process – known as quantitative easing (QE) – was devised as a way to spur lending after the banks had already cut headline interest rates to near-zero. By buying bonds, the central bank reduces funding costs for commercial banks in the hope they’ll pass the savings on to businesses and individuals.

The ECB, which only stopped its last QE program in December, already holds so much debt it’s running out of bonds to buy. Under the eurozone’s QE rules, it can’t own more than a third of any one government’s debt – and economists estimate it’ll bump up against those limits within a year. So either eurozone governments agree to lift that limit altogether, or they start spending more and issue more debt to fund the splurge 💸 Neither would be popular in Germany, which, in recent years, has been running a budget surplus and reducing its overall debt – exactly the opposite of what Draghi thinks is required.

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🥡 Takeaways

1. The skinny-jeaned hipster of central banks.

If the ECB does run out of bonds to purchase, it could follow the Bank of Japan (which was doing QE before it was cool 😎) in buying other assets to stimulate growth and boost inflation – stocks, for example. Again, opposition from Germany and others suggests that’s not likely anytime soon. All this helps explain why markets shrugged off the ECB’s announcement of more stimulus: in a reversal of what you might expect, the euro actually climbed and government bonds fell. Although, as readers of our News And Markets Pack know, sometimes it’s better to travel than arrive.

2. More Sonic than Mario.

Draghi – who earned the nickname Super Mario for his efforts to prop up the eurozone – sounded pricklier than Sonic the Hedgehog at his press conference on Thursday 🦔 He again urged eurozone governments, particularly frugal Germany, to juice the economy with more spending (i.e. fiscal_ policy) rather than relying on central banks’ monetary _policy. Draghi will chair just one more ECB meeting before stepping down at the end of October.

🎯 Also On Our Radar

Thomas Picketty is back! After winning a surprisingly large audience for his 700-page opus “Capital in the 21st Century” in 2013, the French economist has returned with another critique of the growing gap between the rich and the rest. “Capital and Ideology” is even bigger at a bookshelf-busting 1,200 pages, and recommends hefty wealth taxes and limits on how many company shares any individual can control 📕 With the gap between the richest 1% of Americans and the rest widening to levels not seen since the 1920s, perhaps some of his ideas will get an airing in the run-up to next year’s US presidential election.

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