Is The ECB Implementing ZIRP or ZEURP: Zero European Union Return on Potential

Reggie Middleton's picture

Inflation vs deflation vs stagflation 

Inflation vs deflation vs stagflation

The primary business of banks is lending.

  1. In a recession, not many people and businesses borrow, hence lending tends to be a poor business.
  2. In order to make money off of lending assets you need a reasonable return.
  3. When ZIRP (Zero Interest Rate Policy) is applied, said reasonable return does not exist unless banks dramatically mark up the cost of the loan which brings up back to point one.

In the states I made this point when most analysts insisted that ZIRP was good for the banks, to wit...


Now remember, I've been very bearish on the EU and thier banks and sovereign debt in particular, since Q! 2010 - way before most - reference Pan-European sovereign debt crisis. Yesterday morning if you were to Google the term EU recovery, you would see something like this in return... 

Well, somebody better tell Draghi, as per Bloomberg: ECB Cuts Key Rate to Record Low to Fight Deflation Threat

The European Central Bank cut its benchmark interest rate to a record low after a drop in inflation to the slowest pace in four years threatened its mission to keep prices stable.

Policy makers meeting in Frankfurt today reduced the main refinancing rate by a quarter point to 0.25 percent. The decision was predicted by three of 70 economists in a Bloomberg News survey. The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m.

The ECB now has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.

“There comes a point where inflation is so weak, and coming in weaker than anticipated, that the case for loosening policy becomes too hard to resist,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London, who predicted the cut. “Bad unemployment numbers only make the case stronger.”

Does it seem like I've predicted the future hear once again as that Financial Nostradamus Dude???


Quantitative Easing

A Fed-style quantitative easing program has repeatedly been ruled out by ECB policy makers. The central bank is barred by European Union treaties from financing state debt, making large-scale purchases of government bonds open to a legal challenge.

While Draghi has floated the prospect of a negative deposit rate, the rate for commercial lenders who park excess cash at the central bank, policy makers have said that its effects can’t be adequately predicted. A negative deposit rate could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.

“If inflation stays low, as seems likely, and the threat of inflation expectations becoming unanchored to the downside increases significantly, then all the tools in the box can come into play,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “But knowing the way the ECB operates and how long it has taken to try and get support for a refi rate cut, doing the big stuff could take some time.”

Well, I believe QE has already been implemented by the ECB accepting trash sovereign debt as marketable collateral, but that's a discussion for another day. Just listen to the Financial Nostradamus dude when he warns what happens when a larger, admitted QE program is instituted. For one, you'd probably eliminate that inflation problem... replacing it with...

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robdashu's picture

If the real cost of housing is rising, the cost of inputs to build and maintain housing being the drivers, that will increase the replacement cost of existing stock. Diminishing supply should then be a positive factor in housing prices. Where will things balance?

dick cheneys ghost's picture

even 'Victor the Cleaner' was stumped by the suprise ECB rate cute

''The Euro zone is entering dollar support mode again, and Draghi advertizes this openly in his press conference.



Diplodicus Rex's picture

"The primary business of banks is lending."

I disagree with that statement. The primary business of banks is wealth transfer. Traditionally that has been achieved by lending, I agree. But if the transfer of wealth can be achieved by other means (QE, currency debasement, fraud, "inflation") then there is no incentive to "lend".

"In order to make money off of lending assets you need a reasonable return."

I also object to the term "lending". By the dictionary definition of lending then a physical asset (or the title thereof) must change hands temporarily and then returned to the original owner after the loan period. In our current currency model the currency is created out of thin air at the inception of the "loan". Therefore it does not conform to the dictionary definition of "lend" since that which was "lent" was spirited out of thin air and does not resemble a tangible, real-world asset.


Until we stop using their corrupted vocabulary we will never educate the masses on this enormous, egregious fraud.

SAT 800's picture

I bought two Dec. Silver Contracts today on a price order. I put it in overnight at $21.50 and it got hit. The Bank rate move is inflationary in tone; the waterfall today at the New York opening of Silver was the floor traders cleaning out little longs; running stops, and taking their positions at the bottom; they think Silver will go up some next month. (That's about their time line; either a week or a month). I wouldn't mind seeng 23.50 before Christmas.

ThirdCoastSurfer's picture
  1. "3. When ZIRP (Zero Interest Rate Policy) is applied, said reasonable return does not exist unless banks dramatically mark up the cost of the loan which brings up back to point one."

What is dramatic about 4% -6% on a home or auto loan? 

What is dramatic is what banks pay for the use of the collateral required to obtain a ZIRP loan. 

All things exist in balance and is bereft of voids (except at the top of a thermometer) even if it is not readily apparent what or where that balance is. When you take from one, you deprive another. And most of all, most of economics is centered on the various definitions of "margin".  

In the invisible hand of a free market, when you fail to pay the equitable amount for the use of another's capital, forcing the market to artificially create demand in another market, you create a distortion. The manifistations of this distortion are complicated, but an easy, if incomplete example is the boost the the 2% FICA tax reduction gave to the economy, except in reverse. The FICA was funded and added to debt, ZIRP takes from the economy. What's hard to grasp is that it is not the amount that matters, it is the disruption, the distortion. A lot of small distotions add up to a very, very large disruption.  If millions stubbed their toe on the same day, the disruption would be much larger than if hundreds of thousands sufferd something much worse.

We spend our time looking at the wrong things. We blame the leaves on the tress for falling without looking to the roots for the answers. Money is never the cause of anything. Money is more inert than a rock or a diamond. Money only points to an imbalance and fills the void. What we need to do in encountering an economic problem is look for the cause of the void and in the case of ZIRP it is in the very small margin of return for the use of capital. 


SAT 800's picture

I'm on your side Reggie; I wouldn't buy a Spanish bond even they gave me a toaster to go with it. well, maybe ONE bond, if it was a really nice toaster.

Rick64's picture


  Greek stock market ASE is up 43% in 1 yr. Ireland's stock market ISE is up 36% in 1 yr. Spain IBEX is up 34% in 1 yr.  Portugal PSI20 is up 25% in 1 yr. Germany DAX is up 25%in 1 yr. FTSE is up over 1000 pts. in a yr.  Boursa Italiano is up 34% in 1 yr. 

 Another ETF that can be a proxy for European banks is the iShares STOXX Europe 600 Banks ETF trading on the Frankfurt Stock Exchange. This ETF is up by 20.99% year-to-date in Euro terms.

Bank of Ireland is up over 100%.

 Nostradamus ???

Reggie Middleton's picture

Actually, that video was from 2010 discussing content from 2009. The markets and banks you mentioned were routed thoroughly, so yes I do feel I was rather prescient. Each sovereign that I mentioned to be at extreme risk either defaulted or restructured or both. Banks were rescued in mass, and even the unconnected to reality equity markets took a beating. The returns you are quoting now are from the artificial bubble created in an attempt to unwind and prevent the organic crash that was well on its way and in my oh so humble opinion will have its way yet. 

The Europeans have proven expert at can kicking and political transformation of economic and financial woes, but an economic loss is a loss is a loss, and they have plenty of them.

Rick64's picture

Now remember, I've been very bearish on the EU and thier banks and sovereign debt in particular, since Q! 2010 - way before most - reference Pan-European sovereign debt crisis. Yesterday morning if you were to Google the term EU recovery, you would see something like this in return...

 Looks like you are still bearish even now if I read correctly. Would you hold a short position while it went 20%-100% against you?  Its 2013 and Europe is 1 yr into a bull market . I think it will collapse again too but its years away.

fonzannoon's picture

An economic loss may be a loss. but a speculative gain is still a gain, and they have many of them. They look set to continue. I'm not breaking your balls, just point out that this artificial bubble may have a long ways to go.

Reggie Middleton's picture

But there were no speculative gains at the time of the video, for one. The man said I was premature, and I wasn't. How much did those Greek bondholders who bought at par get again? In addition, the 2nd video clearly shows losses and gains when as I said they would occur. The first video explains how ZIRP distorts reality so as to allow nominal gains when economic losses occur, but it also goes on to warn that its smoke and mirrors and will not end well for most. 

I'm just defending myself. I'm wrong enough where I don't need to have people making up incidences of my being wrong.

fonzannoon's picture

No need to defend yourself because I was not breaking your balls. This whole thing is just a nightmare. It's more than smoke and mirros though Reggie. This is massive global coordination and they are going all the way with it.

SAT 800's picture

Well, Rick64; now you know what to do next. Take your profit on these ill-advised, (mindless), examples of the mass-mind malfunctioning and be happy. Going up too fast is what things do before they blow up; they're called irrational bubbles.

Rick64's picture

 He may be right, but isn;t it a little early to celebrate? His predictions haven't come true. I am not saying what is going on is sustainable, but he is way too early. They are just starting a bull market. Don't underestimate the bankers and the elite. 

moneybots's picture

What does one hedge for?  This thing just keeps dragging on and on, with no end in sight.

SAT 800's picture

the Metals will win in either case; sort of like a horse race where all the other horses have a big bandage around one ankle, and limp into the starting gate.

Motorhead's picture

Long time, no see, Reggie.  If I was banging Lauren Lyster, I wouldn't be around much, either!

DavidC's picture

I have no idea whether that's true or not but it certainly made me smile! Lauren, both beauty and brains, what a combination!


WordSmith2013's picture

"Now, all we can do is sit back and watch the relentless erosion of every economy on earth through deflationary downward pressures, and all of its consequent stages of devolution.  The fungus of deflation will guarantee that every national economy will deteriorate.  This most pernicious variety of deflationary mold is known for the many phases of deterioration it brings upon the host nation, so we know there will be periods of both hyperinflation and stagflation, mini-booms and maxi-busts, commodity-specific buying sprees (e.g. gold) and unprecedented market blowouts, runs on the banks and flights to foreign currencies.  In the end, the nations of the world will be thoroughly decimated by the plague known as asset deflation.  The economies of the regional financial unions/economic super-states (e.g. European Union) will be particularly vulnerable to the extent that they chose to play this game of BUBBLE monopoly (see the EURO)."