Has the European Central Bank saved the world?

The author has recently been helping out with the coaching at his son’s “Minis Rugby” club and, although the team has had some notable successes of late, one of the problems we find is that when a seven-year-old novice catches the ball (which is not in any case guaranteed to happen….) you never really know which try line they are likely to aim for – their own line or the opposition’s. On more than one occasion we have had players attempt to score at the wrong end.

We relate this story simply because it seems that the ECB’s President, Mario Draghi, is now going to pass EUR60 billion into the hands of the financial community (via the ECB’s bond purchases) every month and then see which way they run with it. 

The ECB is clearly hoping that the world’s and, in particular, Europe’s investors will take the ECB’s new, very generously-provided funds and either invest them in the Eurozone Periphery so that they can provide some form of monetary stimulus through either the region’s banking systems (unlikely) or, more probably, via the securities markets. This is how “money printing” is supposed to work.

Some within the ECB may also be hoping that some of these funds find their way outside the Eurozone, thereby orchestrating a further competitive devaluation of the Euro on their behalf. There are those within Europe that want an even weaker Euro exchange rate and a number of the major brokers are forecasting further decline in the external value of the Euro, but we would caution that were the Euro to weaken too much further and, conversely, were the USD really to strengthen further, then this could not only increase the deflationary pressures in the US and elsewhere, it might also cause problems within the emerging markets as the viability of an estimated USD6 trillion of carry trades were undermined.