How to Hang on to Greenland
Jim Bianco, head of the eponymous research firm, handily won the internet last Thursday with the following tweet:
Jim Bianco has an excellent idea as to how Denmark might after all be able to hang on to Greenland, a territory coveted by His Eminence, POTUS GEESG Donald Trump (GEESG= God Emperor & Exceedingly Stable Genius).
Evidently the mad Danes running the central bank of this Northern European socialist paradise were reacting to the ECB Council’s decision earlier that day to carpet-bomb the euro zone economy with another dose of monetary napalm.
The sad spectacle was the outcome of the penultimate ECB meeting chaired by Mario Draghi, who will undoubtedly enter the history books in the “what not to do” section, inter alia as the only central bank chieftain who didn’t raise interest rates even once during his entire term.
Mario Draghi, the scourge of Old World savers
The Beatings Will Continue Until Morale Improves… or Something
The following tablet engraved with decisions was handed down from the Europe’s Central Planning Olympus:
(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
(2) Net purchases will be restarted under the Governing Council’s asset purchase program (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
(3) Reinvestment of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favorable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the euro-system’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.
(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.”
We will briefly comment on points 2–5 of this long list of interventions below and focus on the first one in Part 2.
Regarding point (2), the resumption of QE: market participants reportedly expected that €40 billion in monthly purchases were in the offing and were therefore somewhat disappointed by the announcement. European bond markets have become junkies, and QE is their heroin.
Disappointment disturbance in the negative yields farce: yields on German Bunds rise to minus 44.5 basis points in the wake of the ECB announcement…
Point (3) means that the central bank’s balance sheet is not going to shrink for a long time to come – hence all the money created by the original QE program will continue to slosh around in the economy. This is less of a problem than the decision to create even more money ex nihilo, since prices and economic activity have in the meantime adjusted. This is evident by the fact that the brief sugar high provided by previous QE operations has completely dissipated.
Regarding point (4), the modalities of the TLTRO-3 program are now such that banks will be able to borrow funds at interest rates ranging from zero to minus 0.5%, i.e., they will be paid for borrowing money from the ECB. Why this is even called an “interest rate” is a bit of a mystery.
If this arrangement strikes you as perverse, that’s because it is perverse. The more new credit a bank pumps out, the better the rate that will be applied to its TLTRO borrowings. It is an additional money (and debt) creation program.
Point (5), the introduction of tiered deposit facility rates, is intended to alleviate the impact of negative rates on bank earnings. Our guess would be that the amounts falling under the exemption will be fairly small, since the negative deposit facility rate is supposed to propagate outward through overnight interbank lending rates (if a bank has to pay a 0.5% penalty rate on bank reserves deposited with the ECB, it will be happy to lend its reserves at -0.45%, since losing 0.45% is obviously better than losing 0.50%).
Obviously, none of the “non-standard” monetary policies implemented by the ECB and other central banks have even met their stated goal of boosting price inflation, not to mention economic growth. Evidently, since they are opting for even more of the same, it has yet to occur to them that their policies may actually be counter-productive.
The process is reminiscent of many previous attempts in history to revive economic activity by means of money printing.