Quantitative easing in the eurozone to the tune of €1.1 trillion has not raised consumer price inflation as the ECB had expected.

But neither bureaucrats nor central planners ever evaluate the effectiveness of their programs. Rather, when something does not work, they do more of it, until it does work, with no regard for the economic bubbles or other negative consequences.

Those expecting more monetary madness were rewarded today when the ECB Opens the Door to December Stimulus as expected.

The European Central Bank signalled it would expand its €1.1tn quantitative easing programme in December and cut its deposit rate should the slowdown in emerging markets threaten the eurozone’s economic recovery.

The euro plunged 1.67 per cent against the dollar to $1.116 after Mario Draghi, the ECB’s president, said policymakers’ measures would need to be “re-examined” in December.

He said the central bank stood ready to adjust the “size, composition and duration” of its QE package. At the moment, it is buying €60bn of mostly government bonds a month and has said it will continue to do so at least until September 2016.

Government bond yields, which move inversely to prices, fell across the region, with Italian and Spanish benchmark 10-year borrowing rates dropping to the lowest level since April and the shorter-term two-year German borrowing rate hitting a record low of minus 0.32 per cent.

As well as expanding the QE programme, the ECB could also break an earlier promise to leave interest rates unchanged and cut its deposit rate further into negative territory, a move which is likely to further weaken the euro if implemented.

The ECB president said cuts into negative territory by other central banks, such as the Swiss National Bank and Scandinavian authorities, had led the ECB to reassess where the lower boundary for interest rates lay.

“We’ve seen the experience of other central banks and now we’re thinking about that,” Mr Draghi said.

With that, let’s take a look at some currency and interest rate reactions.

German 2-Year Bond Yield

German 2-Year Bond Yield Weekly

Italy 10-Year Bond Yield

Spain 10-Year Bond Yield

US 30-Year Bond Yield

Euro/US Dollar

In Europe, there were large interest rates swings in nearly every county. In Germany the move was primarily in short-term durations. In the peripheral countries, the swings were in longer term durations.

In the US, treasury yields declined, but the move was muted.

In Forex, Draghi got an oversized move where he wanted as the Euro sank vs. the US dollar.

A strong US dollar has hurt US manufacturers so the Fed will likely not be pleased with this competitive currency debasement.

Economic Madness

Quite frankly it’s nothing but economic madness to demand consumer price inflation.

Nonetheless, central banks are not only bound and determined to achieve inflation, but with methods that failed for decades in Japan and more recently in both Europe and the US.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” is still unanswered.

Mike “Mish” Shedlock