World’s Most Reluctant Stimulus Program Gets Underway

In what can only be described as the monetary policy-equivalent of a mercy f**k, the Northern European political elites have consented to a quantitative easing program to stave off deflation on the continent.

It was a long time coming, but it’s finally here – the ECB will buy bonds from the marketplace and directly from European institutions in a bid to get some liquidity into the system and jolt investors into taking more risk. This is literally the last thing the Germans and Dutch actually want to do, but the relentless trend of weakening economic data has finally forced their hand.

Some details from the New York Times (emphasis mine):

The European Central Bank said on Thursday that it would begin buying hundreds of billions of euros worth of government bonds in an aggressive — though some say belated — attempt to prevent the eurozone from becoming trapped in long-term economic stagnation.

The bank’s president, Mario Draghi, said the central bank would begin buying bonds worth 60 billion euros, or about $69.7 billion, a month. That is more spending than the €50 billion a month that many analysts had been expecting.

That bolded bit at the end is my favorite part – where they pretend that 60 billion euros is more than what was expected. Where did the lower expectations actually come from? Well, the ECB itself floated a rumor of 50 billion euros just yesterday. The whole process of trying to create a positive shock for the markets is a total joke at this point, it’s as translucent as Macauley Culkin’s skin. Anyone can see through the entire exercise.

As for the question of whether or not it will “work”, the answer is that it will not “work” on the economy, although it will probably have an impact on the markets. This would be in-line with the US QE experience and the Japanese QE experience. In reality, only time works on the cycle. But assets can be juiced and bubbled with QE, almost at will. The problem is that the transmission mechanism whereby gains from an asset bubble translate into actual gains for the economy is far from ideal and is barely effective.


The US needed three and a half rounds of QE over the course of 6 years and even now the benefits for the average worker or business are still debatable – despite how awesome all this stimulus has been for investors and large corporations.

In Europe, it is even harder to create a wealth effect that transmits – Europeans have their retirements paid for by the government and so there is way less participation in the stock and bond markets by individual investors. Wealthy Europeans tend to be people whose ancestors had killed or enslaved a lot of people and, as a result, ended up with titles and lots of real estate and inherited status. I’m totally kidding. Today’s European rich are less likely to want to spend more money just because the mutual funds that they hold at the bank are trading higher.

Wealthy Europeans have done really well for years in sovereign bonds (bunds!) as well as their US stock holdings – and that hasn’t helped. So why would more of that help? It won’t.

Anyway, that’s what’s going on. As I write, the euro currency continues to crash – despite the fact that everyone thought today’s news was already”priced in”. I guess it wasn’t. The EuroStoxx 50 index of European stocks is up 1.5% but European small caps and bank stocks are barely moving – not a good indicator of any kind of enthusiasm at the moment.

But regardless of the market’s reaction, the world’s most reluctant stimulus program ever has now gotten underway. Limp-wristed high fives all around!

One other thing, and this is a central tenet of my macro views: “The good news is, it still works. The predictability of wealthy white people is still intact.”

So we have that going for us. Which is nice.


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