ECB president Mario Draghi is under self-imposed pressure to do something dramatic on March 10 to ward off fictitious problems that he associates with consumer price deflation.
To that end, the market expects Draghi will crawl further down the rabbit hole by cutting its benchmark rate by 10 basis points (0.1 percentage points) to -0.4%.
Will that provide the drama Draghi seeks?
In its post Here’s How Draghi Can Free Up $900 Billion of Debt for QE, Bloomberg estimates Draghi could “free up” $478 billion worth of QE eligible bonds by cutting the rate to -0.4% and $903 billion with a cut to -0.6%.
About $900 billion of sovereign debt that meets maturity criteria for the European Central Bank’s quantitative-easing plan yields less than its deposit rate, putting the securities out of reach of the program. A 10 basis-point cut to minus 0.4 percent at this week’s meeting, the median estimate of economists, would free up about $478 billion, according to the Bloomberg Eurozone Sovereign Bond Index, with 20 and 30 basis-point cuts bringing another $268 billion and $157 billion into play respectively. The risk is the benefits may be short-lived — yields have fallen further since the ECB, led by President Mario Draghi, cut its deposit rate in December.
Freed Up for What?
By “freed up”, Bloomberg means the ECB could cut rates deeper into negative territory so that the ECB’s benchmark rate is lower (more negative) than some $900 billion in bonds that already trade with a yield less than 0.30%.
Bonds trading at yields higher (less negative) than the ECB’s benchmark rate would be eligible for QE.
Ludicrous Example
Got that? Some $900 billion in bonds yield between -0.3% and -0.6%.
The following weekly chart of German 2-years bonds shows yields have been negative since August 23, 2014.
Ludicrous Discussion
It’s clearly ludicrous for bonds to have negative yields, but here we are. And Draghi is expected to increase the degree of ludicrousness on March 10.
Would that “free up” anything?
I expect not. Bond rates are ahead of the ECB, thanks to its telegraphing every move in advance. Here’s a beautiful example, also with Germany 2-year bonds. This time, a daily chart highlights recent action.
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That big green candle is from the ECB’s last meeting on December 3. At that time, the market threw a hissy fit but Draghi quickly stepped in to promise more action, and the market responded in advance.
Given that ECB asset purchases are run about $60 billion a month, it would take 15 months for the ECB to burn through $900 billion in stimulus.
15 months from now, who knows how deep the rabbit hole will be?
How to Free Up €14 Trillion
A quick check of ECB’s Euro Denominated Securities Report shows the ECB might be able to “free up” €14 trillion ($15.4 trillion) with the right policy move now.
Since that’s where we are ultimately headed, Draghi may as well make that announcement on March 10 and do it all at once.
By the way, I am not sure if such a move a would cause the least bit of consumer price inflation. Instead, it might crash the system.
However, the benefit of such a move is obvious. We could finally get the bazooka proponents to shut up.
Mike “Mish” Shedlock
That was the most Mish post in a long time! Bravo!
Hey, hey now. Cut that out. That’s Mishtalk.
(aaah, I’ve been wanting to say that.)
So money no longer has value except to Bloomberg, banks, bureaucrats. The average “Josephine” better start paying attention to what is happening to time value of her life.
Steve Keen has updated his basic relation that aggregate demand equals income (GDP) plus the change in debt.
The new relation is aggregate demand equals GDP plus the change in debt plus realized capital gains (losses).
This translates to:
Aggregate demand equals other people’s aggregate income (because one man’s income is another man’s demand) plus new credit money created by banks (not yet included in GDP) plus a Ponzi term showing that those few escaping the current Ponzi economy enabled by banks creating new credit money to pump up asset prices (aka QE) have a positive capital gain which they can spend adding to aggregate demand. This explains the current behavior of the CB’s world wide. If asset prices fall there will be massive realized capital losses which subtract from aggregate demand. If banks stop lending the change in debt will go negative thus subtracting from aggregate demand. So now, even if CB’s divert money printing from QE to helicopter drops the damage to asset prices (and realized capital losses therefrom) may exceed increases in aggregate demand induced by helicopter drops. Check mate.
In summary there are three sources of new money to support aggregate demand:
Fiscal deficit money constituting a helicopter drop of some flavor.
Increases in bank credit money (not likely at this point).
And realized capital gains which can possibly accrue to a few lucky early exiters from the current asset Ponzi but only a few.
So it’s looking like check mate for increasing aggregate demand. All roads lead to demand collapse. Either by credit collapse or by realized capital losses or both. An entire civilization, indeed, the world, may be about to learn it’s a bad idea to get involved with a Ponzi lending scheme.
The flaw in your definition of aggregate demand involves credit. Why should debt for the purpose of chasing asset prices higher or stock buybacks be considered ‘aggregate demand’? Debt for the purpose of asset bubble building is not investment, it’s fraud intended to take savings from whoever was left holding the asset when the price collapsed.
Not fraud so much as mass self delusion. This is the essence of Minsky’s financial instability hypothesis. Banks identify an asset class (in 2008 it was housing, in 1929 it was equities) they think is bulletproof collateral. They lend against this asset class producing new credit money to buy this asset class in the process. Thus the collateral goes up in value. So banks view this asset class as bulletproof collateral. So they lend…etc.
this process reaches an end point when total private sector debt is too large to service at which point the process reverses. Asset prices fall making them terrible collateral so banks refuse to lend against them so prices fall so…GFC.
At this point central banks became not lender of last resort while private debt was reduced by running fiscal deficits and through bankruptcy (which they should have done) but rather they became asset buyers of last resort through QE. Total private sector debt came down just a little then resumed growing.
So we bought some time at great cost, the cost being about one lost decade growth wise. Until private debt comes down to around 60% of GDP from 150% now we will have perpetual stagnation. Essentially the beatings will continue until moral improves.
“And Draghi is expected to increase the degree of ludicrousness on March 10.”
Well, some people expect this but does everyone? Is there anyone important who expects Draghi NOT to continue with ludicrousness? How about the BIS?
BIS says hold on? Via Automatic Earth:
http://www.telegraph.co.uk/business/2016/03/04/debtor-days-are-over-as-bis-calls-time-on-world-credit-binge/
Draghi only cares about Mr Market.
Damn the real economies or the people in the streets.
Until Mr Market revolts (it will sooner or later) policy will remain on auto pilot.
For a long time I have held back from commenting on your deflation views. But time I did….
I agree with you that consumer deflation does not, over the long term, reduce consumption.That is all lip service designed to cover the real reason politicians don’t want protracted deflation….the ability of businesses to repay loans. When considering whether to loan small businesses money,banks want to see earnings projections to assess the ability to repay loans from free cash flow. With inflation, it us easy to forecast rising revenue due to rising prices, which, so long as expenses do not rise faster, means it is easier to repay fixed payment loans with inflated dollars. In a deflationary environment, you are repaying loans with deflated dollars…well I’m sure you get the idea.
So the real reason politicians don’t want deflation is that they fear it will constrain credit growth.
The argument could be extended to consumer loans, except that only housing loans are sufficient long duration to be of concern, and LTV ratios supposedly protect against that, together with the expectation that salaries will rise, not just due to inflation, but due to work experience and seniority.
Regards
Negative interest rates: If we debauch the currency enough people will buy Volkswagens and Deutsche Bank shares.
Oh, Really?
No, O’Reilly.
Reblogged this on HISTÓRIA da POLÍTICA.
My comments keep disappearing. What’s up?
They are getting pulled into the void of understanding created by negative rates – it is there to teach people who try to make sense of something which doesn’t that they are as clueless as the policy.
Now do you understand?
It’s possible, but I’ve lost about six so far over the past few weeks. It’s starting to be too much trouble. Negative rates stink, but they don’t cause everything. They just bail out governments that live on credit cards and fool everyone else who goes along and feels it’s easier to believe the lie than challenge it.
The only trouble I have had is comments being held back for a while, that makes keeping a discussion going difficult or not possible. Preferred Discus by far, lost some good commentators in the switch and gained others, but the previous comments section was going well. Maybe Mish should mirror this site on blogger and leave it to itself there?
All of this should be illegal. There will come a time when the people say enough. Five states got their welfare SNAP budgets cut by this administration and last night people were on TV pissed off. Yet they will not get upset with banks basically stealing their hard earned labor they exchange for Fiat currency.
People that save will basically save more and not put it in the bank. I am debt free and will never keep my currency in the bank. Sure they can impose capital controls but in the end I will get it out. Even if that means 4 trips to the bank. The world is basically going mad over something created out of thin air.
“All of this should be illegal.”
It could be, if enough people ran to the phone and called congress. but that isn’t going to happen.
Who are the buyers of negative interest rate bonds?
Is it the same or foreign central banks, same country or foreign country private bond traders, international currency traders, sovereign treasuries, or …. ?
When the interest rate of these NIRP bonds hit an inflection point I would expect very different global consequences if the NIRP buyers are all central banks versus highly leveraged international currency traders arbitraging an interest rate spread.
Is it possible that central banks are more than happy to delve in NIRP in order to be able to pay off maturing assets that they gorged themselves on without getting into outright monetary inflation? In other words, until a few years ago, central banks came to protect their pals, if not board members, from the banking system, but now they are worried about their own solvency, if not their little necks?