The ECB and the Global RecoveryJanuary 27, 2015
The EU has finally spoken, creating the capstone to the policy response that has been building in reaction to last year’s unexpected global economic weakness. ECB President Mario Draghi announced that the central bank would purchase €60 billion in securities a month (which includes €50 billion in new commitments) for the next twenty months, generating the €1 trillion increase in their balance sheet promised earlier. The program was left open ended, with a goal of bringing inflation back to the ECB’s 2 percent target. The euro fell on the news, despite the fact that it had been leaked earlier in the week and largely matched market expectations. One can only judge that the financial markets have not been swayed by earlier rhetoric and waited for the proof to be in the pudding. As in the case of Japan and the US, the bulk of the movement in the equities and currency markets is probably in the rear view mirror with the program now clearly outlined—but the response of the real economy will be many months in the future. Our view remains that the global economy is currently flat on its back looking up, with a high probability that global growth, interest rates and energy prices are higher a year from now.
Piling on the policy bandwagon, we saw the Swiss abandon their ill-advised peg to the euro; the Canadian central bank unexpectedly lowered interest rates in response to the energy slump; Brazil raised interest rates as it intensifies its fight against inflation; and, in the UK, the MPC shifted to a unanimous vote for unchanged interest rates. There is clearly no lack of problems in the global economy, but policy makers appear to be ready, willing and able to address them—which is a considerable change from a year ago. We do not agree with the details of every policy (nor were we asked), but virtually every shift appears to remove or reduce an imbalance that has hindered more efficient allocation of resources. As always, more could certainly be done, but the adjustments in incentives in our view is more than enough to get the ball rolling—and well understood multiplier effects (you know, dynamic scoring) will accelerate the process.
The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.