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Sunday, 22 October 2017

On the ECB, base psychology and taxes

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Anthony Peters considers the hype in the markets.

Two days to go until the meeting of the ECB’s Central Council and speculation on what and how QE is going to happen is building up like the excitement just before the opening ceremony of the Olympic Games. We know it’d going to be spectacular… we just don’t know how spectacular it is going to be.

There are manifold warnings that the markets are over-hyped and that they are cruising for a bruising. I disagree. To be sure, the spectacular capitulation by the Swiss National Bank on Thursday has put many of the more sceptical minds at rest in as much as there is still a lingering feeling that the peers at the ECB must have advised the Swiss that they were about to be caught on a sticky wicket and that the former’s panic response can only have resulted from them acknowledging as much. If ever there has been a capitulation trade, that was the one.

The ECB Council’s Benoit Coeure has been all over the headlines with his assurances that whatever the ECB touches by way of QE will have to be “effective” – in other words, there has to be no doubt that it will be coming out with all guns blazing and that nobody should be in any doubt what its intentions are. We’ve had the “Big Bazooka” and we’ve had the “…whatever it takes…” and now we’re due…well, let’s see what they choose to call it.

Polls among market strategists now seem to be indicating a shift in the anticipated size of the QE programme from €500bn to €600bn but I would not put it past Saint Mario and his disciples – including or excluding the principle German Apostle who can be seen as either a Judas or a Doubting Thomas – to try to fairly blow the markets’ socks off by announcing something closer to €750bn. In order for the QE to work – and we still don’t know whether it will or not – it cannot afford to have people humming and hawing as to whether it is big enough or bold enough. It needs to be an unqualified show-stopper.

That said, I remain a sceptic. The markets have, however, got themselves into one hell of a stew over the QE programme and my guess is that the Central Council will want to wrest back the initiative. Anyhow, what are extra few hundreds of billions of QE amongst friends?

I was intrigued to hear the IMF’s Olivier Blanchard suggest that ”in a way, the effect of QE has already happened. I think the markets have been anticipating it, interest rates have already decreased, the euro has depreciated.” That, sir, can reverse very quickly of disappointment replaces enthusiasm. I do, nevertheless, credit Saint Mario with a very good and clear understanding of the rather base psychology of the participants in markets, and thus my money is on the ECB erring on the side of defensive recklessness.

Taxation in a state

Meanwhile, the US is girding its loins in anticipation of tonight’s annual Presidential Address on the State of the Union. Most of the loin girding will be taking place amongst the richest as he seeks to address tax inequality. His intention is to rebalance the burden of taxation away from the lower middle class towards the wealthiest members of society and towards those who make money from making things and not just money from money.

I have looked as some of the proposals and what strikes me is that it just makes the unfathomably opaque US tax system just that little bit more complicated. Main beneficiaries would be, as ever, accountants and tax lawyers. That said, the chances of any of these proposals passing to the statute book remain thin. The Republicans control Congress and American politics has become so polarised that President O’Bama could most probably propose the total abolition of taxation and the Republicans would vote it down, simply because it had his signature on the bill.

The White House surely knows that it is deeply in Lame Duck territory but O’Bama will be able to move out in January 2017 in the knowledge that he was trying to do the right thing but that he had been frustrated by a truculent and inflexible Congress. The fact that both houses are so firmly in the hands of hostile Republicans of course has nothing to do with him, his idea of how to govern and his desire to play every meaningful golf course in America while nobody can be seen to refuse him entry.

The State of the Union Address will be barnstorming stuff with about the same chances of survival as those of the pilot of a Yokosuka Ohka. Six years into his eight years in the White House – I will never quite understand how he succeeded in winning a second term – O’Bama apparently still hasn’t learnt much about how not to attack a hostile Congress head-on.

Eight years of Dubya followed by eight years of O’Bama – and there we are worried about the elections in Greece.

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