Mario Draghi Admits Global QE Has Failed: "The Slowdown Is Probably Not Temporary"

Tyler Durden's picture

Undoubtedly, the most amusing this about the prospect of more easing from the ECB (as telegraphed by Mario Draghi last week) and the BoJ (where Haruhiko Kuroda just jeopardized his status as monetary madman par excellence by failing to expand stimulus) is that both Europe and Japan both recently slid back into deflation despite trillions in central bank asset purchases. 

In other words, the market expects both Draghi and Kuroda to double- and triple- down on policies that clearly aren’t working when it comes to altering inflation expectations and/or boosting aggregate demand. Indeed, both Goldman and BofAML said as much last week. For those who missed it, here’s Goldman’s take

The subdued and increasingly persistent inflation dynamics that have prevailed in recent years may have eroded central banks’ best line of defence in the face of adverse disinflationary shocks. The energy-price-driven decline in Euro area inflation from 2012 to 2015 has thrown this possibility into even sharper relief.

 

By embarking on unprecedented balance sheet operations and forward guidance, central banks in Europe have sought to ring-fence domestic inflation expectations and signal their intention to maintain monetary conditions easy for a protracted period of time. Mario Draghi himself described the ECB’s asset purchase programme as a way of ensuring that very low (and, at times, negative) inflation does not lead wage- and price-setters to adjust their behaviour to a perceived lower steady-state rate of inflation. However, judging from market-based implied measures of longer-term inflation expectations, the effectiveness of the ECB’s announcements has proved limited so far.

Or, visually:

Meanwhile, many critics have accused the ECB of adopting policies that work at cross purposes with Berlin's insistence on fiscal rectitude. That is, the more Draghi's PSPP drives down borrowing costs, the less effective the "market" is at pricing risk which in turn means investors aren't able to punish governments for budgetary blunders. In other words, Spain, Portugal, and Italy shouldn't be able to borrow for nothing based on the fundamentals, but thanks to the ECB they can - so why implement reforms? 

And so, ahead of what might fairly be described as one of the most highly anticipated ECB decisions in history, everyone's favorite Goldmanite gave an interview to Alessandro Merli and Roberto Napoletano. The transcript can be found on the ECB's website, but we've included some notable excerpts below. 

Perhaps the most interesting passage comes at the outset with Draghi essentially admitting that global QE has demonstrably failed:

The conditions in the economies of the rest of the world have undoubtedly proved weaker compared with a few months ago, in particular in the emerging economies, with the exception of India. Global growth forecasts have been revised downwards. This slowdown is probably not temporary. To illustrate the importance of emerging markets, it is recalled that they are worth 60% of gross world product and that, since 2000, they have accounted for three-quarters of world growth. Half of euro area exports go to these markets. The risks are therefore certainly on the downside for both inflation and growth, also because of the potential slowdown in the United States, the causes of which we need to understand fully. The crisis led to a sharp drop in incomes. It is up to us to push them up again.

So, a couple of things there. First, we agree that the "slowdown is probably not temporary." Indeed, as we've documented extensively, we've likely entered a period of lackluster global growth and trade, and there's every reason to believe this is structural and endemic, as opposed to fleeting and cyclical. Second, the last bolded passage there speaks volumes about what's wrong with the current central planner "strategy." No, Mario Draghi, it's not "up to you" to push up incomes. It's "up t you" to get out of the way and the market figure this out. Central planners had their chance to boost wage growth and they failed - miserably. 

Here's Draghi on the effect oil prices are likely to have on inflation expectations going forward:

As far as the next few months are concerned, the most relevant factor will be the price of energy. We expect inflation to remain close to zero, and maybe even to turn negative, at least until the start of 2016.

Of course what Draghi doesn't say is that ZIRP is a contributor. That is, when you ensure that capital markets remain wide open, uneconomic producers continue to dig, drill, and pump and that contributes to lower prices and thus, to a deflationary impulse. 

And here's Draghi explaining that the idea of the "lower bound" is becoming antiquated thanks to Europe's descent into NIRP: 

Now we have one more year of experience in this area: we have seen that the money markets adapted in a completely calm and smooth way to the new interest rate that we set a year ago; other countries have lowered their rate to much more negative levels than ours. The lower bound of the interest rate on deposits is a technical constraint and, as such, may be changed in line with circumstances.

Again, it's all about what Darghi doesn't say. The reason NIRP is still doable is because it hasn't yet been passed on to household deposits:

Here's a bit from Draghi on inflating away massive debt piles...

Low inflation has two effects. The first one is negative because it makes debt reduction more difficult. The second one is positive because it lowers interest rates on the debt itself. The path on which fiscal policy has to move is narrow, but it’s the only one available: on the one hand ensuring debt sustainability and on the other maintaining growth. If interest rate savings are used for current spending the risk increases that the debt becomes unsustainable when interest rates go up. Ideally, the savings are instead spent on public investments whose rates of return permit repayment of the interest when it rises.

And finally, here's how the ECB chief explains away the idea that central bank stimulus is incompatible with fiscal retrenchment: 

Structural reforms and low interest rates complement each other: carrying out structural reforms means paying a price now in order to obtain a benefit tomorrow; low interest rates substantially reduce the price that has to be paid today. There is, if anything, a relationship of complementarity. There are also other more specific reasons: low interest rates ensure that investment, the benefits from investment and from employment, materialise more quickly. Structural reforms reduce uncertainty regarding macroeconomic and microeconomic prospects. Therefore, it is the opposite, rather than seeing an increase in moral hazard, I see a relationship of complementarity, of incentive.

Sure. So what Draghi wants you to believe is that the EU periphery is committed to budgetary discipline and all the ECB is doing by artificially suppressing borrowing costs is making the transition to fiscal responsibility less painful. Here's proof of how well that strategy is working:

But none of this matters. DM central bankers are all-in on this; that is, there's no turning back. Just as night follows day, the ECB will ease further which will lead directly to more easing from the Riksbank and the SNB. Similarly, the BoJ will likely end up attempting to further monopolize the Japanese ETF market and may ultimately move into individual stocks in an insane attempt to control corporate management teams and mandate the wage hikes that Abenomics has so far failed to produce. 

That said, both the ECB and the BoJ are running out of monetizable assets which makes us and others wonder whether they will not become gun shy, having realized that they've finally bumped up against the limits of Keynesian insanity. 

Whatever the case, just note that while Mario Draghi is quite adept at playing emotionless bureaucrat (unless a twenty-something is throwing glitter at him), it seems clear that DM central bankers are now beginning to question their own omnipotence and as Kuroda will tell you, "the moment you doubt whether you can fly, you cease to be able to do it forever."

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nmewn's picture

KROOOGMAWN!!!

order66's picture

"because of the potential slowdown in the United States, the causes of which we need to understand fully"

Because we need to know why trillions in asset purchases have only caused wealth inequality and not wage or inflation growth. But, in the meantime, we're going to do what they've been doing anyway, because it makes us rich people richer.

That way, when we bankrupt the country, we'll still be wealthy and that's all that matters.

Macchendra's picture

Forget printing more money for socialist misadventures (ignoring that the FSA is really the military industrial complex, the NSA, the police state welfare queens).  We need the banksters to print more assets in the form of derivatives so they can short and long to win!

turtle's picture

It will be interesting to see how hard MSM & elites try and escalate the Russian jet incident into all out war for their desperately needed cover event for the imminent global financial implosion.

knukles's picture

PRINT!
A liquidty trap is a monetary phenomenon caused by non-monetary factors.

Boris Alatovkrap's picture

Painful is watching Central Bankster lie, but more painful is hear economist and reporter repeat lie, but biggest painful is watch common horde of citizenry swallow it up every bit wihtout batting glassy eye stare.

Be calm and take selfie.

knukles's picture

Awesome!
Thousand Kudos  
Perhaps found in Stalin's Crypt.

Boris Alatovkrap's picture

Boris is make available for selfie for viewing pleasure.

Captain Debtcrash's picture
Captain Debtcrash (not verified) Macchendra Oct 31, 2015 7:57 PM

As I’ve said, they want to try something new.  Banning cash, and significantly negative rates, or even the E Dollar to follow the next crisis.

TahoeBilly2012's picture

Good point, the buy all the assets and nothing happens....but they then own everything!

FreeShitter's picture

10+ years of stagnation/depresson

WWIII

Macchendra's picture

Let's have a war!  And blame it on the middle class! (or the poor, as they now are.)

https://www.youtube.com/watch?v=yJAlIHsXcLY

TahoeBilly2012's picture

Saw Fear bunch of times. Those were the days!

Exalt's picture

"Give guns to the queers, the enemies within"...

Philo Beddoe's picture

C'mon Tyler. Fuck this guy. 

Bla bla bla. We all know. 

CHoward's picture

It's going to get worse so that's GREAT NEWS, right?!?!?!!?!!!?!

Eyeroller's picture

"The slowdown is not temporary"

Translantion:  BULLISH!  We're going to print MOAR!

Aussie Battler's picture

It a debt based, financialised global economy, Central Banks desire to keep inflation/eco growth running is equivalent to keeping debt and asset markets inflating. Needless to say it is a recipe for disaster, the world is so debt saturated many people can't afford to houses etc. They're creating a new serfdom.

Phoenix901210's picture

There are also other more specific reasons: low interest rates ensure that investment, the benefits from investment and from employment, materialise more quickly. Structural reforms reduce uncertainty regarding macroeconomic and microeconomic prospects. Therefore, it is the opposite, rather than seeing an increase in moral hazard, I see a relationship of complementarity, of incentive.

... Nope, nothing.

Aquarius's picture

Hahahahahahahahahaha...

It's a comedy, Oui? Economics is a never-ending comedy with fools and clowns as the players. You can't make this stuff up. Brain-dead comes to mind.

http://verbewarp.blogspot.com.au/2015/10/its-not-economy-stupid-its-econ...

And, their Stupid Economic Theory(S) as well as their Stupid.

It appears that STUPID is now a Polticalized Cult.

'And, the Stupid will inherit the Earth' (old biblical quote:)

Ho diddley hum

 

Roars of Laughter (RoL)

newnormaleconomics's picture

It is wholly inaccurate for critics to claim that ECB QE "has not worked", as the primary objective, as in the US and Japan, was always to provide "whatever it takes" in terms "thin-air fiat digital credits" to the banks and financial system (and pensions, in the case of the EZ) to buy sovereign debt to prevent nominal GDP from contracting with gov't spending as a share of GDP of ~50%. 

That's it. 

Critics are judging the "success" of ECB QE on a false assumption, that is, that QE is supposed to "stimulate" growth of private lending and thus an acceleration of private economic activity. Wrong. 

Consider that with ECB QE, the printing is ~10% of the EZ/EA economy at money supply at a velocity to private GDP of ~0.5 (Japan is now 0.4). Do the 7th-grade math. It requires ECB QE of ~11-12% YoY at 10% of GDP and a velocity of 0.5 to private GDP to achieve a 1-1.5% rate of nominal GDP growth with ~0% inflation.  

Simply put, were the ECB not doing QE, EZ nominal GDP would be contracting 1-1.5%.

But the acceleration of EZ money velocity to private GDP is contracting, just as is occurring in Japan and the US, which is unambiguously deflationary.  

ZH's Tylers need someone to explain this reality to the masses, because no one else will. I'm sure at lesat a few of the Tylers understand it. 

 

Ouagadoudou's picture

You are right, everybody wants to see the QE as a "political" decision to spur growth. It's not. They just have no choice. There is not enough money, that's all. Even central bankers try to find dumb reason to cover the facts, name it fight again inflation anticipation or trickle down effect. That's laughable. 

km4's picture
Mario Draghi....hang um high !
Latitude25's picture

So what are ya going to do about it Mr. Central Banker, print with abandon?  You're a one trick pony right?  Or is complete cultural anarchy in Europe more to your liking as a distraction from your stupidity?

Ajax_USB_Port_Repair_Service_'s picture

Ah come on Draghi! Give QE a few more years.

Gatos Locos's picture
Gatos Locos (not verified) Oct 31, 2015 8:17 PM

Somebody needs to throw a shoe at Draghi...

 

tttan's picture

every country that practised QE and easing has stagnant economy and low inflation in the last 6 years. QE worked for 1 month and then fizzled out. All the so called smart monetary authorities are not so smart after all and probably corrupt to help their buddies make money to secure them a job later. All of them try to clone and condition the market to think, react and behave like them. Every statement that comes from their mouths are " economy is bad and slow and inflation is low" and dismay.. Who in the right miind will expand their companies and which consumer will spend.  Bunch of clowns and stupid politicians

Eyeroller's picture

Obviously QE hasn't worked because they haven't printed enough. 

/s

Aquarius's picture

"It is wholly inaccurate for critics to claim that ECB QE "has not worked", as the primary objective, as in the US and Japan, was always to provide "whatever it takes" in terms "thin-air fiat digital credits" to the banks and financial system (and pensions, in the case of the EZ) to buy sovereign debt to prevent nominal GDP from contracting with gov't spending as a share of GDP of ~50%. "

 

OK. That has not worked either as the Banks stopped lending into the levels that actually employ people and grow the GDP. Due to this stealth taxation has increased for the unwashed further deflating growth through lack of productivity and amsses of unemployment (Oh goodie)  while at the same time, manipulation by the same culprits and well aided by those influential Bankers and economists (fools, charlatans, and clowns), has increased organized crime from the Top Down. They call this Policy "trickle-down".

Crime Pays so this is success.

So whatever else, the ECB et al have been doing, then, seems to have worked: That is, It hasn't worked. Or, IOW, it was never intended to work as none of these clowns, fools and charatans, ever knew what it was that they were doing, in the first instant.

Success - whatever that means. Maybe Crime is the Policy; bleed the suckers?

 

Hahahahahahahahah The Ship of Fools.

Ho diddley hum


Racer's picture

disinflationary

negative inflation

 

FFS

Deflation is GOOD!

Phoenix901210's picture

It's some complex mix between the both isn't it! (Inflation and deflation)

holdbuysell's picture

Prediction: When this all implodes, the PhD in Economics will become the most loathed and ridiculed degree in history.

samjam7's picture

Economists will be able to burry Keynes once and for all and Austrian school of economics will find the place it deserves. Economics as a social science (because that's what it is) will never cease to exist. :)

yogibear's picture

Those Pile it Higher and Deeper (PhD) types will blame on the savers.

Ouagadoudou's picture

Hélicoptère money on its  way + NIRP. You MUST buy moar stuff

Grandad Grumps's picture

Draghi should be flogged and jailed. He is worse than useless. He and his type are destructive to the world. The world needs good people and good people are not attracted to banking ... or politics.

Itch's picture

"the moment you doubt whether you can fly, you cease to be able to do it forever."

 

Yeah, that tends to happen in dreams though.

JailBanksters's picture

That's not very keynesian, what you really wanted to say is

you didn't QE enough, you should have QE'd your brains out until you actuall worn down the fingerprints pressing the Print Screen button.

But there's always Hidden QE, continue to QE to Infinity Squared, you just don't tell anyone. Does anyone remember who we gave a Quadrillion Dollars to this morning ?, anybody, it must be somewhere.

Batman11's picture

 "the moment you doubt whether you can fly, you cease to be able to do it forever."

I thought that quote came from Disney's "Dumbo".

 

docinthehouse's picture

Our economy is illusion based on debt.......not growth.   These central bank guys (sorry yellen) are gonna be tarred and feathered.....or worse.  

People still think government is something other than a blood sucking parasite..........because they depend on a check from them I guess.

70% of millenials want no part of debt....except maybe school debt  LOL  They are on the right path.  Now lets get them in the white (debt) house.

 

 

docinthehouse's picture

Our economy is illusion based on debt.......not growth.   These central bank guys (sorry yellen) are gonna be tarred and feathered.....or worse.  

People still think government is something other than a blood sucking parasite..........because they depend on a check from them I guess.

70% of millenials want no part of debt....except maybe school debt  LOL  They are on the right path.  Now lets get them in the white (debt) house.

 

 

homiegot's picture

What would happen if we let a simpleton run the world's banking and financial systems?

Dr_Snooz's picture

"No, Mario Draghi, it's not "up to you" to push up incomes. It's "up t you" to get out of the way and the market figure this out. Central planners had their chance to boost wage growth and they failed - miserably. "

I marvel at this libertarian belief in the power of "free markets" to fix everything, despite overwhelming evidence to the contrary. The market cannot ever fix this mess. So long as there is a long line of thieves and parasites ready to bleed any new market participant dry, the free market will be incapable of sorting this out. Any sane investor knows that the HFTs are going to steal his investment capital. Every aspiring enrepreneur knows that Obamacare and a gaggle of captured regulatory bodies will smother his business in its crib. No one with any business sense is going to take a risk in this environment.

We need systemic, sustained and meaningful reform. Bankers and their politician lackeys need to go to jail. Captured regulatory bodies need to be brought to heel. Piratical corporations need to have their charters revoked. So long as entrenched, epidemic and pervasive corruption is allowed, capitalism will continue to do what it does best, which is to concentrate weath in the hands of billionaires while impoverishing the middle class and poor. This libertarian propensity to chant "free-market" with greater fervor will accomplish nothing.

Exalt's picture

Free market implies complete reform of public spending, banking and market regulation to be "free".

So really your position is a libertarian one, you just don't really understand what libertarianism is.

Oh the irony.

YesWeKahn's picture

These central bankers are either vilain, stupid or incompetent. I think they are vilain.