“The definition of insanity is doing the same thing over and over again and expecting a different result.” – Albert Einstein
A few remarks to the European Central Bank’s strategy and the impact for you as an investor or saver
The 10th of March 2016 could be the date in (financial) history, when the once almighty and highly respected institutions of Central Banks became not only powerless but a real threat for the general economy and thereby for you and me.
The decisions of that 10th of March by the European Central Bank (ECB) contains a further cut in the ‘deposit rate’ to a negative 0.4%, then a lower ‘refinancing rate’ to now 0.0% and an increased ‘asset purchase program’ – 60 billion EUR/month didn’t do the trick for a year, so let’s try it with 80 billion EUR/month.
The intention of the ECB-decision on Thursday (rising stocks and a falling EUR vs the USD) took place initially, but was very short lived. In a remarkable reversal, the EUR then climbed back to 1.118; that’s a 1-month high against the USD. In a separate reversal, stocks gave up the gains and turned negative at the market close in Europe and on Wall Street.
It’s a clear sign, that investors have lost faith in the ECB and their monetary policy. It seems furthermore, that the monetary tools of the Central Bank don’t work anymore. On the contrary, inflation, which ECB-President Mario Draghi wants to push up by printing more and more Euros, still is exactly zero.
Well, a powerless ECB is not a yet a disaster per se, it’s just a reminder that a ‘managed policy’ will always be opposed by strong market-forces, if that policy is on the wrong track.
In my view, the ECB is on the wrong track and shows no sign to change that course in the foreseeable future – and this is getting serious and dangerous. Not ‘only’ for financial markets, but for everyone.
For the (good intention) to boost the european economy, the ECB prescribes a medicine, that not only fails to heal, but causes dramatic side-effects. But instead of lowering the dose, the ‘money-doctors’ rise it constantly thereby creating even more dramatic side-effetcs:
The deposit-rate, now at -0,4%, is a rate between banks. Any regular bank who deposits their funds at the ECB, will be punished to do so. The idea behind is to ‘motivate’ business- and retail-banks to lend the money as loans to enterprises and individuals and stimulate the economy – instead of hoarding the client’s cash.
The reaction was, that banks avoided to deposit their money with the ECB and started to keep the cash in their saves physically, because this is cheaper (and I got remembered to my childhood reading the Disney comics with poor Donald Duck and his wealthy uncle Scrooge McDuck, who regularly took a ‘bath’ in his cash-stuffed ‘Money Bin’).
What any employee in a credit-department of a bank around the corner could tell the ECB: A bank doesn’t change their lending policy primarily on an interbank deposit-rate, the only game-changer would be an improved credit-score by applicants. After all, wasn’t the ‘credit-for-all’-mantra the main reason for the real-estate-bubble in the US (and other places like Bucharest) and the subsequent financial- and banking-crisis?
But as long as the eurozone-economy has deep structural and political problems in the periphery
(Greece has yet to implement key bailout conditions, Spain has yet to form a government since its December elections, Portugal and Italy are in budget standoffs with the European Commission) as well as to many business-unfriendly regulations and a general lack of confidence towards the future by consumers, the creditworthiness of many companies, start-up’s or individuals won’t improve.
The ECB’s policy has only the effect, that cheap money destroys trust in the long term and let governments to delay required reforms.
One unintended, yet almost perverse effect of the ECB’s policy is, that many – already well financed – companies from around the world tap the credit-markets basically for free and use the cheap money to buy back their own stock in order to boost their earnings per share which in turn is positive for the management’s ‘performance-bonus’ only – but for sure does not much positive for the general economy.
Speaking of the general economy, here is the problem everyone will be affected quite severely, if the ECB doesn’t change it’s policy.
As a saver, an owner of a life-insurance policy or as a future pensioner, you and I are directly a victim of the ECB’s stubbornness.
Traditionally conservative european insurers and pension funds who cannot achieve the promised returns from the bond-markets in this subzero-interest-world, are forced to turn increasingly to risky property bets to fulfill their obligations to private clients or future pensioners. It’s a very bad timing, because the money-printing frenzy by central banks already created property-bubbles. Be prepared for a readjustment of your future income from your life-insurance or your pension.
How can you compensate a partial fallout of an expected income? The answer is more saving today for a rainy day tomorrow, but don’t bring your savings to the bank. Keep it in a safe or buy gold.
This forced savings are exactly the reason, the euro-economy is crippling as less and less money is spent for goods and services. And this won’t change, even when the ECB lowers the rates further – on the contrary: Europe, where in the coming decade will see millions of ‘baby-boomers’ to retire with probably much less money than initially promised, is on the brink to follow the bad example of Japan, if this devastating money-policy by the ECB is not stopped very soon.
Crucial financial decisions: ECB-headquater in Frankfurt, Germany