Tuesday, August 26, 2014

European Central Bank Considering QE?

In what some are calling a possible hint of major policy shift, ECB President Mario Draghi made news with his speech at Jackson Hole, Wyoming. Here are a couple of articles analyzing his comments.

Quotes from this article:

"European Central Bank President Mario Draghi on Friday signaled a departure from the austerity-focused mind-set that has dominated economic policy-making in the euro zone since the onset of the region's debt crisis nearly five years ago, as officials struggle with stagnant economies, weak prices and high unemployment."

"The GDP data "confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lackluster demand," he said."
"His remarks signaled a new approach to these risks: combining policies to stimulate demand with efforts to make labor markets more flexible. With inflation at very low levels—annual inflation in the euro zone was just 0.4% last month, far below the ECB's 2% target—policy makers should cast aside any fears that stimulus policies may lead to inflation and instead focus on keeping high unemployment from taking root in Europe, he suggested. The euro zone's unemployment rate was 11.5% in June, far higher than in the U.S., U.K. and Japan."
Quotes from this article:
"European markets cheered dovish words by Mario Draghi at the start of the week, after the president of the European Central Bank (ECB) delivered a wide-ranging speech which many deemed to mark a key turning point in rhetoric."
"Draghi's comments, at the Jackson Hole meeting of central bankers in Wyoming on Friday, raised expectations of further policy easing by the central bank. Hopes of further stimulus pushed stocks in Europe higher on Monday."
"Philippe Gudin, an economist at Barclays, called Draghi's speech a "major breakthrough", and said his comments on inflation were a sign the bank could be readying additional easing measures in the near term, such as a quantitative easing (QE) program."
My added comments: After reading both of these articles (as readers here should do) a question comes to mind. Are the most recent forecasts by the IMF for global growth going to be too optimistic once again? It is clear from these comments the Europe is not doing well and the threat of deflation is worrying Draghi. Sanctions against Russia are now another added drag on global growth. China is seeming some signs of problems as well. 
All this then raises another question. If global GDP is going to come in below forecasts once again, what about the forecasts for US GDP? How much confidence can we place in those? Will we see the US Fed having to backtrack next year and admit US GDP is coming in below expectations? Will this lead to yet another round of QE in the US as Jim Rickards and many others are predicting?
Right now the weakness in Europe is causing markets to sell the Euro which is causing the US dollar to rally (since the Euro is the biggest currency in the US dollar index). But if the ECB raises the white flag of surrender and starts in QE it may cause IMF forecasts for global GDP to lose more credibility. If the US then falters into 2015, the FED forecasts will also lose credibility. This could start to cause a lack of confidence in ALL fiat based currencies as markets realize that only never ending QE programs are preventing a deflationary collapse.
Obviously, this is all very important and relevant to our theme here of watching for signs of monetary system change. If GDP falls below expectations yet again and Central Banks respond with QE yet again, it could be a spark that leads to major change. We will follow it of course.

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