Tuesday, was eerily quiet in the markets. Tuesdays have in many respects become a key day as Mondays have lost their sparkle, as have Fridays, and thus the second day of the week is now when the big things happen.
What was even more telling was that it was a Tuesday after one of those five US public holidays which annually occur on a Monday (Martin Luther King Day, Presidents’ Day, Memorial Day, Labor Day and Columbus Day). On those, business activity around the globe tends to be muted but catch-up is played on the Tuesday. That did not happen yesterday.
Surely the impending ECB meeting has lots to do with that. I’m not sure how many permutations of the QE programme – or whatever special acronym they will find for it – there might be but I must have heard or read most of them in the secure knowledge that whatever is announced will not be exactly what people expected.
The questions, as to the probable efficacy of pumping money into the system, remain unanswered but it seems to be broadly agreed that anything less than an open-ended programme will fail to spark whatever it is that believers expect it to spark.
Juergen Stark, formerly chief economist and member of the executive board of the ECB and (needless to say) a German critic of QE, questions the fears of deflation but questions even more their use as an excuse to move towards it. He recently said in an interview: “QE is meant for countries in the periphery and not for the northern euro countries.” In doing so, he shot a very large missile through the very principle of “one size fits all” monetary policy. Just as an aside, he suggested in the same interview that a write-down of Greek debt is unavoidable which is fairly self-evident, but at this moment in time still strictly contrary to Berlin’s official stance on the matter.
Starter, not the engine
Just as the ECB is slaving over this hot topic, the Bank of Japan, grand-master of pouring money down black holes, has reduced its inflation forecast for the coming year from 1.7% to merely 1.0%. Clearly the fall in oil prices – Japan has to import every drop it consumes – isn’t helping the BoJ in its quest to raise inflation but at the same time it demonstrates the powerlessness of individual central banks.
In automotive terms, monetary policy is supposed to be the starter motor of economic activity, not the actual engine. The BoJ has been placed in the position where it is expected to act as the latter and we all know what eventually happens if we try to use a starter motor to kangaroo-hop down the road. What was once seen as a risk but has now proven to be reality is pure Keynes who famously wrote that using monetary policy to fight recession is like pushing on a piece of string.
It may sound silly but I’m pretty sure that most members of the Central Council of the ECB know that implementing QE at this stage in the cycle is an exercise in futility but that not implementing it is in all probability even worse. Head you win, tails I lose.
Meanwhile, President O’Bama gave the very barnstorming speech we’d all expected. He looked back at six years of his administration’s unbridled success and predicted a rosy future for the Union. Well, he didn’t get elected twice by not knowing how to spin a good yarn in the face of adversity. In fact, the situation in the US isn’t all that adverse and even if it is all but plain sailing, the list of countries which would love nothing better than to be faced with America’s economic problems is very long indeed.
His appeal, nevertheless, for bi-partisan action sounded hollow given the make-up of Congress and given the past confrontations. There is a strong feeling that he does not respect the elected men and women on Capitol Hill whereby even I must cut him some slack on that front. He spoke well but clearly threw down the gauntlet at the same time. I suspect a further two years of legislative gridlock ahead.
His beloved “hard-working American families” were given the usual airing with respect to a rebalancing of the tax burden but as I noted yesterday, the US tax system requires not reform but complete, bottom up reconstruction which simply isn’t going to happen. With both houses on Capitol Hill firmly in Republican hands and with 1600 Pennsylvania Avenue in possession of a veto, we might as well do a Rip van Winkle until January 2017.
