With every central bank scrambling to export deflation, and with the Saudis doing everything in their power to definancialize crude as an investment asset and destroy the US shale patch, it is probably no surprise that the ECB is utterly hopeless to prevent Europe from sliding into an all out deflationary contraction, which this morning Eurostat confirmed when it reported that in January, Euro Area deflation was "worse" (assuming it is worse when consumers pay less for goods and services, which it only is if they are sinking in debt) than the -0.5% expected reading, instead sliding from -0.2% in December to -0.6% in January, which also happens to be tied for the worst deflationary print in the Euroarea history, matching the number from July 2009 when the world was reeling in the global Great Financial Crisis depression.
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In retrospect, 6 years of money printing hasn't done anything to improve the global economy.
The driver of this massive deflationary print: plunging energy prices, courtesy of the House of Saud:
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But there's good news: rejoice, for even more deflation means even more Q€, which also means even more QE by everyone else as the race to export re-export and re-re-export deflation is now in its final stages. From the WSJ [13]:
Last week, the ECB said it would purchase €60 billion ($68 billion) in public and private debt securities each month, mostly government bonds, starting in March and lasting until September 2016 in a bid to bring inflation closer to the bank’s 2% target.
Still, the longer consumer prices persist in negative territory, the more pressure the ECB will eventually come under to extend the purchase program. Officials have said it won’t end until they are confident that inflation is on track to reach their objective.
The program “will end only once we get a strong sense that inflation is converging toward 2%,” ECB executive board member Benoît Coeuré said in an Italian newspaper interview this week.
The latest drop in inflation was driven largely by falling energy prices, but also by declining prices for manufactured goods as businesses passed on some of the savings they have made on their energy bills. Food prices also fell, while prices of services rose more slowly than in recent months.
And while core inflation rose 0.6%, hardly a glowing achievement, the drop in crude prices - which as noted yesterday is now the biggest "Hamilton Oil Shock" in history - is about to have various downstream effects:
This trend will worry ECB policy makers, who want to prevent the fall in oil prices having “second-round effects” as other businesses cut their prices to gain market share and workers settle for lower pay rises. The ECB worries that households and businesses will grow accustomed to falling prices, and postpone some spending decisions in anticipation of a better deal later in the year, in turn leading to falls in output and further drops in prices.
Beyond the threat of a deflationary spiral, the decline in prices could, on the other hand, help boost consumer spending power in the near term, to the extent that falling prices are driven by lower energy costs.
The WSJ tries to spin this as benefiting household spending: "A bounce in consumer spending aided an acceleration in Spain’s economy during the fourth quarter, statistics institute INE said Friday. The eurozone’s fourth-largest economy grew 0.7% in the three months to December, compared with the previous quarter, INE said. That is equivalent to an annual pace of growth of 2%, INE added. In the third quarter, it had posted 0.5% growth from the earlier period."
Which is great, however considering the unprecedented levels of unemployment in Europe, any attempt to put a silver lining on this particular mushroom cloud will be not only short lived but, shortly, quite radioactive.
The punchline, and what the WSJ gets right:
If inflation falls deeper into negative territory and gets stuck there, it would raise even more doubts about whether eurozone debtor countries can recover without restructuring their debt that would spread more of the cost of cleaning up Europe’s crisis to creditor nations such as Germany.
Which is what we have been saying all along: Europe's financial problem is not with QE, not with stock markets, not with the corporate bond transmission channel, but with the €1-€2 trillion in secured bad loans on the books of bank balance sheets, which the ECB can not monetize (at least not yet). And fixing this will require a global, coordinated bailout backstopped by at least on sovereign, i.e., Germany. Something tells us if and when the time comes for Germany to finally provide the payback for all those years of benefits it reaped thanks to a currency weaker than the DEM, it will call it a day and pull the switch on the great monetary and political experiment.
