Mario Draghi, Monetarist Mule

The never-ending push for 2% price inflation is absurd to the point of being counterproductive.

However, stubborn central bank mules don’t care about history or common sense. They just keep doing what their fatally flawed model says they should do.

The ECB’s stubborn mule, a Downbeat Draghi, is Ready to Beef Up Quantitative Easing Package.

The euro and eurozone government bond yields plunged on Thursday after the ECB president indicated it stood ready to extend the “size, composition and duration” of its €1.1tn bond-buying programme.

“We are observing a weakening of the prospects of the Chinese economy,” Mr Draghi said. “This has two effects substantially: one is through trade . . . and the confidence effect on the stock market and all other financial markets.”

In a sign of policymakers’ willingness to reinforce their QE package, the ECB raised the purchase limit of a single country’s debt stock from 25 to 33 per cent. That decision should remove some of the constraints on central bankers in member states such as Germany, where the government has voiced its reluctance to issue more debt in the coming years.

Inflation forecasts for this year were revised downwards to 0.1 per cent, from the 0.3 per cent estimate in June, 1.1 per cent next year from 1.5 per cent, and 1.7 per cent in 2017 from 1.8 per cent. The central bank targets inflation of just below 2 per cent.

Growth forecasts were revised down to 1.4 per cent this year, from 1.5 per cent, 1.7 per cent in 2016 from 1.9 per cent and 1.8 per cent in 2017 from 2 per cent.

At the moment, the central bank plans to buy about €60bn worth of mostly government bonds each month until September 2016. In a further sign of intent, Mr Draghi said for the first time that the purchases were intended to run until then “or beyond, if necessary”.

Infinity and Beyond

If QE doesn’t produce 2% inflation (and it hasn’t worked for going on three decades in Japan, and half a decade in the US) then Draghi’s clear intention is to keep doing what has not worked here, there, or anywhere, until it does work.

To infinity and beyond,” said Draghi.

That’s not quite a literal translation, but it is an accurate expression of what Draghi implied.

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Mike “Mish” Shedlock