Thursday, April 14, 2016

Draghi's German Baggage Follows Him to Washington After ECB Spat


More indignation still being directed at the < ZIRP policy.  They won't drop it.  IMF will take Schauble's side in this as they need positive yields too; just like the European pensioners.  ECB is fine with  < ZIRP as they are probably the recipients of the negative yield so F the other two.

Only thing that will get us out of this is more meaningful US Fed rate increases.




8 comments:

Ignacio said...

NIRP makes no sense, but makes sense in their mind because monetarist thinking. I don't think the FED is going for more raises for now after the current stream of poor data.

Central bankers are trapping themselves because if they don't raise rates they won't have the policy space in the next crisis to act, so that would demolish their monetarist-driven policy agenda and theoretical framework. And this would also pose political risk for them as institutions.

The ECB is in a very hard situation where it's existence is at stake if things get worse, being attacked both from the creditor and the debtor side.

If they raise rates, this would destroy the economies in Southern Europe with all the institutions barely holding above water and private banks in Central Europe with a wave of loan defaults coming in.

Schauble wants the market to clear, following Austrian economics. The ECB has to take into view the delicate position of bankers and the whole Eurozone political balance (in the end their own existence/independence is at stake).

Part of the German establishment, in which I include Schauble, want to unravel the euro, which now they consider a problem, and have been with their suggestions pushing this agenda (ie. Schauble wanted Greece to get out of the euro and have access to some emergency funding, which would have been better than the current scenario).

Matt you are oversimplifying things with your 'only pensions matter' view, there is MUCH MORE at stake than a minority of the population receiving a bit more of outcome.

Just consider that Spain has been without government for almost 6 months and we are going to have a new election soon. That sort of stuff is what Draghi has to worry about, because if there is an uprise of "radical leftist" parties in southern Europe and of "radical anti-EU right" parties in Northern Europe the last thing you will have to worry about is about 1% income from some private pensions.

Matt Franko said...

Ignacio,

Very good summary of the situation from our perspective... pretty high stakes action going on for these people... very tenuous...

" 'only pensions matter' view,"

I'm not saying that.... I am saying it will help and it is the only way we are going to get out of this... as these PTB people dont have the will to do ANYTHING right now via fiscal...

If by happenstance we get the Fed to start raising in earnest, it will lead to increased fiscal via interest income and help... iow it looks to me that we are stuck with the Interest rate increase the only way out ... system is locked up for the reasons you identify above...

Hope you get to Bill's presentation over there !!!


Ignacio said...

There would be some 'trickle down' for sure, but I'm looking at the other side of the balance sheet.

Consider the nominal growth in USA and in Europe are not the same now, Europe is holding barely above 0% inflation, so the effect would be different.

The labour market is also in a different situation, corporations closing closing down would put further pressure, and France is pushing some hardly palatable reforms on this right now which is worsening situation over there for workers.

Tom Hickey said...

Without loosening fiscal, that ship is going to sink.

Matt Franko said...

Ignacio,

If we get the fiscal increases here in the US started via interest income and along with it other USD zombie nations who hold some US Treasuries then they can increase exports to Neil's USD zone and that would help them with their "deficits!" and probably would "trickle down" from there...

They just have NO will for more fiscal... not even WAR at this point they are using the Special Operations doctrine even in the area of war... usually war would lead to fiscal increases but they wont even use conventional forces any more to "save money!"...

System is locking up on them.... they have painted themselves into a corner....

Tom Hickey said...

Interest rates work both ways. Higher rates benefit savers and hurt borrowers. Considering that most of the munnie created in modern monetary economies comes from bank credit, increasing rates increases the cost of borrowing and therefore the monthly nut. Higher rates have a negative effect on demand, like for mortgages. Even a small rate increase can increase the monthly and therefore limited eligible borrowers.

Matt Franko said...

"Interest rates work both ways"

No they don't.....

Tom Hickey said...

No they don't.....

Huh?.

You are probably thinking that interest the government pays are just a fiscal add. They are also benchmarks for rates in the entire banking, financial sector and economy. Even small increases the interest rate have immediate effects on both present decisions regarding consumption and future expectations that influence investment. The key rate that cb's look at is the long term real interest rate, with the 10 yr as the benchmark. That is based on expectations regarding changes in the interest rate.

That's why Keynes preferred low rates to encourage investment, which is the driver of a capitalist economy. Whether "keeping the interest rate too low too long" automatically result in malinvestment is controversial. The MMT focus on ZIRP comes out of Keynes.