Last Week's Biggest Story: ECB Goes to Negative Interest Rates
The European Central Bank head Mario Draghi announced a cut in interest rates below zero - which is to say a negative interest rate. Bloomberg gave us a heads-up on June 3rd, with the official announcement following two days later on the 5th.
The importance of this can't be exaggerated. We're living now in a historic moment. Eventually, as the central banks push up against deflation, and assuming they succeed eventually, the only possible outcome will be inflation at some point. In fact, we're already seeing assets bubbles forming as money flows into stocks, bonds, tangible assets, and anything else that people stash cash that, due to non-existent returns, earns nothing. We may see - and for some items have already seen - selective hikes in prices for certain food items, gas, rents, etc., especially as these items don't show up in government CPI statistics. So be ready for sticker shock at the gas station and the supermarket, even as the government announces that inflation is puttering along at around 1%.
And so goes our world as central banks continue to tinker with the economy and, ultimately, with all our lives.
Europe’s lowest government bond yields since the Napoleonic Wars are signaling investors want more action from Mario Draghi...Napoleon drove his armies across Europe 200 years ago. That's a long time since rates were this low. It shows how serious the threat of deflation remains. More importantly, it shows to what lengths central banks are prepared to go to forestall deflation. With moves like this, we suspect they will eventually succeed. Of course, these rates being historically low means that we are all being used as guinea pigs in a grand experiment by the central bankers of the world. The threat of deflation isn't unique to Europe; it's here in the U.S. as well. We'll wait and see what Yellen and her cohorts have up their sleeves if inflation stays stuck at low rates for an extended period.
ECB policy makers will share their outlook in two days, when they probably will lower the 18-nation currency bloc’s official rate toward zero and take the deposit rate negative for the first time.
The importance of this can't be exaggerated. We're living now in a historic moment. Eventually, as the central banks push up against deflation, and assuming they succeed eventually, the only possible outcome will be inflation at some point. In fact, we're already seeing assets bubbles forming as money flows into stocks, bonds, tangible assets, and anything else that people stash cash that, due to non-existent returns, earns nothing. We may see - and for some items have already seen - selective hikes in prices for certain food items, gas, rents, etc., especially as these items don't show up in government CPI statistics. So be ready for sticker shock at the gas station and the supermarket, even as the government announces that inflation is puttering along at around 1%.
And so goes our world as central banks continue to tinker with the economy and, ultimately, with all our lives.
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