Without a question the best exchange during today's historic Mario Draghi presser, during which the ECB unveiled its own QE, was between SkyNews journalist Ed Conway who first asked Draghi which is more important, the Flow or the Stock - a key argument we had with the Fed when we said back in 2012 that the Flow reigns supreme [7] when we forecast open-ended QE 6 months before its announcement, only for both Goldman and the Fed to agree subsequently and for Citi to conclude that $250 billion in central bank printing, i.e., Flow per quarter is necessary [8] to avoid a market crash - but more importantly, explicitly asked if Draghi's money printing overture will lead to hyperinflation.
The exchange can be found 1:12:45 into the press conference:
The transcript:
QUESTION: There's a big debate at the moment as to whether quantitative easing what matters most is the flow or the stock: the buying of assets or what is already held on the balance sheet. I'm curious as to where you come out on that particular debate?
And second of all what would you say to those who are concerned that when the ECB buying up bonds, electronically printing money, whatever one calls it, is the first chapter in a story that leads inevitably towards hyperinflation. What is your response to that?
DRAGHI: On the first point, the way the introductory statement reads it says that both things are important, the overall amount but also the scale. The scale of these purchases, the monthly flows are quite meaningful as it is meaningful the overall amount.
The second question, well the second question I think the best way to answer to this is have we seen lots of inflation since the QE program started? Have we seen that? And now it's quite a few years that we started. You know, our experience since we have these press conferences goes back to a little more than three years. In these 3 years we've lowered interest rates, I don't know how many times, 4 or 5 times, 6 times maybe. And each times someone was saying, this is going to be terrible expansionary, there will be inflation. Some people voted against lowering interest rates way back at the end of November 2013. We did OMP. We did the LTROs. We did TLTROs. And somehow this runaway inflation hasn't come yet.
So the jury is still out, but there must be a statute of limitations. Also for the people who say that there would be inflation, yes When please. Tell me, within what?
And so yet another central bank confirms the key tenet of central bank dogma, that only the Stock matters, is now null and void and monthly flows are indeed "quite meaningful" - and with Citi having calculated the bogey of $200 billion per quarter, there should be no surprise that between the ECB and the BOJ this threshold is safely reached. In fact, one can be assured that never again will central bank flow, as in money printing, be less than roughly $70 billion per month among the three biggest money-printing entities.
As to the hyperinflation question, Draghi's answer is simple: we have now thrown the kitchen sink at the deflation problem and there has been no inflation (he conveniently forgets to mention that the world is now caught in a vicious spiral in which every single central bank is printing money just to export deflation to its peers, with more and more printing necessary each year just to stay in one place). In other words, just because hyperinflation hasn't materialized so far, it never will.
Or, as Bernanke would say: "Hyperinflation is contained."
As for Draghi's comment at the end, one can respond just as snydely: for the people who say printing money will create growth, yes "when" please. And for those who say that money printing will lead to economic improvement, "tell me, within what?"
As for Draghi's "statute of limitations" comment, he may be right, but one thing is also becoming clearly obvious: as central banks are poised to monetize a record amount of debt this year, 7 years into the "recovery", and as the amount of eligible collateral dwindles to a point where the functioning of the entire market is becoming impaired (see the TBAC's complaints from the summer of 2013 [9]), the moment of "hyperinflationary containment" is coming to an end.
