ECB Decision: Unnecessary, Ineffective But Further Entrenching Bad Habits

After months of whining and whining by the international commentariat, and of relentlessly redefining what any sensible person would call “price stability” as a grave economic problem, the ECB has caved in, as expected, and yesterday announced further stimulus measures.


I have pointed out repeatedly that low inflation is not a problem, and that the slow growth in money and credit that is presently its cause, is understandable and not entirely unhealthy. In many parts of the eurozone households, corporations, governments and banks are adjusting to post crisis conditions. Credit demand is low, which seems reasonable, and banks are preparing for the “asset quality review” by the ECB, and try and get their balance sheets in order.

In recent years the euro has been broadly stable and only appreciated slightly versus the currencies of its trading partners. This means the purchasing power of eurozone corporations and citizens on international markets has increased moderately. Import prices have declined and this has helped keep domestic consumer prices broadly stable. People on fixed income (salaries, pensions, transfer payments) have maintained their purchasing power. It is foolish to argue that such an environment “cripples” overall economic performance.

Furthermore, the line of reasoning of the advocates of easier money is logically inconsistent. If the prospect of stable prices really discourages spending, should the prospect of low and stable interest rates not also discourage borrowing? If, as the “deflationists” claim, people can only be cajoled into spending their money if they are threatened with the prospect of rising prices, do they then not have to be cajoled into borrowing by the threat of higher rates, rather then the promise of low and stable ones (“forward guidance”)? If people don’t consume if prices are not going up, will people borrow if interest rates are not going up? Should the ECB not announce an end to low interest rates soon so to encourage people to take out loans now? – The whole debate is, of course, completely absurd.

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Disclosure: None of the above is to be considered investment advice.

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