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Europe to print €60bn-a-month to fight deflation and euro crisis - but why is it happening and will QE work? (Simon Lambert, This is Money.co.uk) ECB (European Central Bank) president Mario Draghi announced a QE (quantitative easing) program Thursday for the Eurozone that will see €60 billion of bonds purchased per month for 20 months, ending in and including September 2016. The €1.2 trillion expansion of the ECB has the objective of inflation inflation towards the 2% target it has set.
The size of the program is at the upper end of the range that had been rumored (€50 billion per month, for up to 24 months). The total involved is the maximum but the rate of growth is faster (21 months vs. 24).
The structure of the ECB purchase plan was not revealed, but it will definitely include government bonds. What other types of securities may be included were not disclosed. In the final (so far) and largest QE in the U.S. involved similar amounts of government securities and MBS (mortgage backed securities).
As with all QE programs to date, this will put money into the financial system. In general that results in asset inflation and the ECB objective of 2% inflation applies to consumer prices. This somehow seems like trying to fatten hogs by feeding the cows. But that is what these genius "farmers" seem to believe in.
Drahi said that a large majority of the ECB directors approved the new program but it was not unanimous. Sadly Econintersect does not think those objecting were of the mindset of hog farmers but were actually thinking of not feeding any of the animals.
There is more about the euro below.
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Saudi King Abdullah Has Died; Crude Prices Jump (Tyler Durden, Zero Hedge) Oil prices popped $0.80 with the announcement. Is that significant? See next article.
Brent Oil Overview (Investing.com) Price action for 22 January 2015 was well within the range of normal daily movements and oil closed near middle of trading range for last two weeks. The Death of the king of Saudi Arabia had little influence on the market.
Opinion: How you can cash in on the dollar’s coming decline (Michael Brush, MarketWatch) This is a fascinating short article. First, Brush gives some very logical arguments why the dollar should fall if any, some or all of the following occur:
Brush is correct. Either of the first two would weaken the dollar. But the defect here is in the assumption that either are probable in the next couple of years.
The third statement is correct by definition - See the Econintersect annotated chart below. The dollar is at the support line defined from 2006 to date. The implication is that this means the dollar is likely to weaken (pulls back from support). But it is an assumption that is what will happen; all breakouts from patterns must reach a support or resistance line in order to be able to break out. And what Brush is not recognizing in his technical argument is that the chart pattern is bearish:
So we are not considering any action based on what Brush has recommended. Maybe in a couple of years. And maybe not. We'll wait to see which way the flags blow in the wind. See next article for a contrasting view to that of Brush here.
Here's Where The Euro's Headed (Kathy Lien, Investing.com) The new QE program for the ECB has the individual national central banks on the hook for 80% of any losses on securities added to the ECB balance sheet. This is an effort to get fiscal commitment behind the preservation of the euro. By fiscal commitment we mean that tax revenues will be used to "bail out" the financial system in the event that defaults are threatened. This is an economically deflationary overhang (possibility of higher taxes) or an expansion of deficits and either way the euro will be pressured. Lein sees the current level just above 1.13 EUR/USD close to a support of 1.1215, which if broken will lead directly to 1.1 and then parity. History of currency moves following other QE announcements have seen moves up to 500 pips (0.05) in the week after QE was announced. She does not say she thinks such a move is likely here, but if it occurred the euro could go well below 1.1 quickly. (500 pips from 1.13 produces 1.08.) If we apply the 500 pips to the price before the announcment then the level is around 1.11. See the chart from Investing.com below. Note: Brush's chart showing the lowest value around 1.2 was out of date when he posted his article a few hours before the ECB announcement.
From Twitter (Edward Harrison) Whatever the correct exchange rates for the dollar should be the dollar will likely go higher than that.
Uber gives Americans a float to hold in the rapids of the New American economy (Fabius Maximus) Fabius Maximus contributes to GEI, most recently a few hours ago. New part-time and second-job employment technologies such as Uber and Lyft, as well as home rental Airnb, are symptoms of "desperation at work as the middle class crashes and burns ". By the metric shown in the graph below, the middle class has shrunk by 16% since 1970 and by 4.5% since 2000.
See also The Sharing Economy Isn’t About Trust, It’s About Desperation (Kevin Roose, New York) and The Case Against Sharing: On access, scarcity, and trust (Susie Cagle, The Nib, Medium.com)
Other Economics and Business Items of Note and Miscellanea
The economics of optimism (The Economist) Lives of people in poor countries will improve faster in the next 15 years than at any other time in history.
Economics explainer: What is Quantitative Easing? (The Telegraph) Short video.
Obama’s agenda: Clever politics, bad economics? (Fox Business) Video. Inequality is proof the American system works.
The President’s Middle-Class Economics (Tax Foundation)
President Obama’s “middle-class economics” (Washington Center for Equitable Growth)
Washington’s Economic Focus Turns to Middle-Class Angst (The Wall Street Journal) GOP Agrees With Obama’s Push to Boost Americans but Seek Different Approach.
Just Economics: Local living wage up 5 percent (Ashville Citizen-Times) Minimum living wage in western North Carolina is now $12.50 an hour, says think tank.
Doomsday Clock reset at 3 minutes to Midnight! (Frank Munger's Atomic City Underground)
Better late than never (The Economist) QE will help, but less so than in other big economies.
Hot New Trend in Men's Fashion: Visible Penis (NSFW) (Cosmopolitan) Hat tip to Steve Griffin. Ya gotta be kidding!!!
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