Yesterday, President Obama gave a State of the Union Address that contained a series of proposals for US Congress on raising taxes, free education, and carbon taxes.
I commented Obama Howls at the Moon.
Every Obama proposal is Dead-on-Arrival. Obama may as well fire a spaceship at the sun. The spaceship would melt long before it got there.
Draghi vs. Obama
On Thursday, in just a few hours, ECB president Mario Draghi gets his “moment in the sun”. And like Obama who telegraphed his speech in advance, rumor has it ECB Eyes €50bn Monthly Bond Purchases.
Many may be wondering “Can it possibly matter?“
Actually, it does matter, but only in the negative sense. As Steen Jakobsen chief economist of Saxo Bank in Denmark explains “Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History” .
Steen’s rationale, fully explained in a subsequent post is that Lower Interest Rates May Reduce Consumption. That is a proposition that Michael Pettis at China Financial Markets and Lacy Hunt at Hoisington Management both agree with.
Lacy Hunt pinged me with this thought …
“Academic research indicates that QE in the US contracted rather than expanded economic activity, just as it did in Japan. Thus, Steen could have made the even stronger case that since it didn’t work in the US or Japan, it will not work in for the ECB.“
For a detailed explanation, please see Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph.
Gaming the Reaction
I have no particular insights into what ECB president Mario Draghi will say tomorrow. Yet, I suspect he will attempt some surprise move. Surprise moves seem to be the central bank move of the day.
Regardless, whatever the ECB does, those in Germany will say he did too much. Keynesian and Monetarist clowns will howl he did too little, especially if the initial reaction is bad.
Central Bank Impotence
Here’s the deal: Like president Obama, the ECB is impotent. Both bark at the moon. The only thing the ECB can do is make matters worse. Obama cannot do anything at all.
If the initial reaction from Draghi’s announcement is good (something I highly doubt), it will die soon enough.
Central bank credibility is blowing up in smoke left and right. It started with “Rabbit Hole Intervention” by the Swiss National Bank. (See Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story).
Credibility declined more with the announcement Denmark Announces Currency Peg is “Secure”.
Central bank credibility took another plunge today with the surprise rate cut by the Canadian Central Bank. Here’s my take: Canadian Recession Coming Up: Yield Curve Inverts Following Unexpected Rate Cut; Loonie at Six-Year Low.
Fancy that. Multiple central bank shocking announcements in short order. What happened to the alleged increase in central bank transparency?
Later this year, the Fed is supposed to hike rates. 100% of economists expect just that!
Well, what if the Fed does not hike? Or what if the Fed does not hike as much as the market expects? And what will gold do if that happens?
That’s a lot of “what ifs”, but since when have 100% of economists ever been right?
Mike “Mish” Shedlock