Mario Draghi “It’s no use going back to yesterday, because I was a different person then.”

Let me open today with what was a response to the Press Conference of Mario Draghi and the European Central Bank from me on Twitter.

Right now the and Swiss National Bank are rubbing Mario Draghi off their Christmas card list!

So he had not made any friends in Sweden,Denmark and Switzerland and if any of them play darts then a picture of his face may now be on the dartboard. Interestingly there had been no policy moves by the ECB so Mario had deployed Open Mouth Operations or Forward Guidance. I had been discussing on Share Radio’s Global Perspectives programme earlier the issue that against the US Dollar the Euro was pretty much where it was when the QE announcement was made in January. Actually that is also true of the trade-weighted exchange-rate so it woudl appear that Mario looked into his record collection and found inspiration from Boz Scaggs.

Oooh I’m all down on my knees
Please please please
What can I say
Oooh what can I do…

What did Mario do next?

He decided to fully engage in Open Mouth Operations in the Currency Wars. The emphasis is mine.

Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis. In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available.

Boom! You might say. Also you might be wondering why central banks go into purdah when at other times they are willing to give a clear hint and signal some two months ahead? Indeed Mario was so keen on this he told us again and for newer readers the ECB defines pretty much everything around its inflation target. It was not so long ago that a former President Jean Claude Trichet boasted about averaging 1.97%. Not now though.

there are risks….. which could further slow down the gradual increase in inflation rates towards levels closer to 2%.

What will he do?

There were two clear hints and let me open with the one I had suggested might be in the cards on Monday and yesterday.

On the interest rate on the deposit facility, I said before – , I had said it was not discussed. This time it was discussed. Further lowering of the deposit facility rate was indeed discussed,

Not only were currency markets electrified but the central banks of Sweden,Denmark and Switzerland and maybe one or two others would have had their heads in their hands and mulling the thoughts of David Bowie on their housing markets.

And I’ve been putting out fire
With gasoline

But Mario was not finished as he also hinted at some more QE. Apparently 60 billion Euros  a month does not buy you much these days so Mario may well do more. This seems the most likely to me and the emphasis is mine.

These purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation.

Later there was rather a good question on this issue which I shall leave hanging in the air as it has been a theme on here for 5 years or so.

is there a risk that the ECB will just kind of fall into a trap of QE without end? That you keep doing it, that you keep buying government bonds?

The questioner should have remembered the film Toy Story and Buzz Lightyear. This troubled Mario Draghi so much that he woke up Vice President Constancio to help with the reply. Awkward for Victor who used to be able to have a relaxing nap at these meetings. He has been woken up twice in recent times ( and maybe more if you include the glitter throwing incident and the understandably furious Greek who rapped his shoe on the table) which is a signal of trouble on its own if you think about it.

Currency Wars redux

The Euro dropped like a stone and against the US Dollar dipped below 1.11 this morning after being above 1.13 before Mario took aim at it. If we move to the UK Pound Sterling then 1.36 became 1.38. Of course this is not even 24 hours later as I type this but we can say that there was a clear short-term change.

Such moves poses questions for the UK and US but what if you have a currency peg to the Euro? Denmark does and the Swiss have given a currency cap a go and that is why they both have interest-rates of -0.75%! On Wednesday there were rumours of Swiss National Bank intervention which replaced a period of relative calm. I suppose if you are in the game for 583 billion Swiss Francs then what’s a few more? Although of course I am not writing from the perspective of a Swiss taxpayer. So let us mark 1.08 as the exchange rate today and move on.

Bond market bonanza

Let us start with the Swiss where @acemaxx has provided a helpful chart.

Yep that does show negative yields out to 15 years. If we stop for a moment to consider this we can wonder how many finance,insurance and pension business models work in such an environment and conclude that they do not.

In the Euro area itself there has been a change in that 14 of the nations now have negative two-year bond yields with Italy and Spain joining the list for the first time according to Reuters. Oh and the two-year yield in Germany has fallen to -0.35% which means that all the research which told us that bond yields would not drop below the deposit rate can safely be filed in the recycling bin.

If we move to Denmark then we see that according to Bloomberg there had already been a change.

Economists recently surveyed by Bloomberg see negative rates continuing into 2017. That’s not necessarily because they expect rates to rise after that, but because their models just don’t go any further.

Probably for best if we consider the accuracy of long-range economic forecasts! But sadly for Bloomberg’s reporters they had not read my blog and so they took a wrong turn.

Rate cuts are improbable

Although to be fair they do much better here.

Denmark has had mostly negative interest rates since mid-2012…..Main effects have been higher asset prices, not growth

What about those crazy Swedes?

Well Myndos Capital put it succintly.

Hence, the repo rate is expected to be lowered by 10bp (to -0.45%) in December if not before.

Oh and in spite of the fact that by the end of the year the Riksbank will own 24% of the Swedish government bond market they expect more QE too. So property owners in Stockholm will let out a cheer of “thanks” which may even cross the Atlantic and reach the ears of Paul Krugman.


As we appear set to plunge even deeper into the rabbit hole of negative interest-rates there is much to consider. I consigned “lower bound” into my financial lexicon for these times a while ago but there are more nuances now and it was reminiscent of the Mad Hatters Tea Party when Mario Draghi asked himself this question yesterday.

the issue there is how come we announced a year ago that that was practically the zero lower bound and now we’re thinking of going into further negative territory?

Poor old Mark Carney is of course wounded twice by all of this. Firstly his lower bound is a “curiouser and couriouser” +0.5% and secondly his promise of an increase in UK Bank Rate. As to Mario well there is this.

“It’s no use going back to yesterday, because I was a different person then.”

As to Forward Guidance then Mark Carney is trying to be a Pied Piper for UK mortgage holders whilst Mario Draghi is playing the opposite tune. A clash of the titans?

“What a strange world we live in…Said Alice to the Queen of hearts”

21 thoughts on “Mario Draghi “It’s no use going back to yesterday, because I was a different person then.”

  1. I am reminded of the words of Zaphod Beeblebrox:

    ‘Every time you try and operate these weird black controls that are labeled in black on a black background, a little black light lights up in black to let you know you’ve done it.’

  2. When ordinary borrowers have spent to their credit limit, the only people who can spend are savers, and it doesn’t matter how far into negative rates we go, they won’t.

    The credit crunch is now becoming a debt crunch; those who are offered cheap credit don’t want it, and those who would spend at shark-rates, and who are higher-risk debtors have, by-and-large, maxxed-out their ability to service their debt.

    • ‘the only people who can spend are savers, and it doesn’t matter how far into negative rates we go, they won’t.’

      Exactly,and in that very simple explanation is the reason why QE/Negative rates just do not work.

      Put yourself in the mindset of many savers-who tend toward financial conservatism- and they,from my experience,spend the income and really don’t like to spend the capital.

      Our CB overlords have complex solutions to problems that are often undermined by some pretty basic oversights.

  3. It’s going to be interesting to see how the Fed will respond.I’ve heard a few learned types opine that the Fed is hamstrung in terms of QE until the Presidential election cycle is over. I also think there’s a growing realisation in the US that QE hasn’t worked the way they thought it would,but I really struggle to interpret the ‘CB speak’-hence probably why I’m always on here.

    Gradually though,it does appear that the list of CB’s with QE as a prospective weapon of mass destruction is shrinking.The Swiss experience was a salutary lesson for all those who thought CB’s were omnipotent and that control of the money supply was all that mattered.

    Rather more generally,I find it rather sad, that 7 years after they first introduced ’emergency measures’,all Mario Draghi has the wit to do is that which has failed before.

    • Hi Dutch

      There have been a few suggesting a move by the Fed at this months meeting. I do not buy it for 3 reasons.

      1. Why now and not September?
      2. The Fed will be worrying why the Chinese have cut interest-rates yet again (5 this year) and why the ECB is promising to do so.
      3. The US Dollar Index has risen around 2% in the last couple of days so policy has tightened anyway.

      As you say the omnipotence of the central banker which we abandoned on here some years ago is becoming evident to many more people.

  4. On a separate note I do wonder who the hell is buying Spanish and Italian paper on a negative yield……….? You’ve got to love defined benefit pensions.

    Also,I see equities have rallied on the back of it although those facing China didn’t really rally at all.

    On the subject of Mario all WTI had to say was a sound rather akin to a dead cat mistaking tarmac for a trampoline.

  5. Hi Shaun

    Re negative interest rates I found this very interesting:

    What it shows is that when CB rates go negative the commercial banks are reluctant to charge negative rates at the retail level so maintain their margins by increasing rates. So, perversely, a foray into negative CB rates can actually result in an increase in market rates.

    Also it is surely obvious that if retail depositors are faced with significant negative rates then they may well respond by converting deposits to paper money which is tantamount to a bank run if large numbers do this.

    Unintended consequences?

    With regard to the ECB expanding QE I thought they were already having difficulty in finding things to buy. At this rate they’ll be buying ice cream futures before the end of the year!

    As you say this is a rabbit hole down which everyone is headed in sheer desperation. Nixon really set the ball rolling in 1971 when he took the $US off the gold standard and with all this nonsense going on you do have to wonder whether the days of fiat money are coming to an end.

    • Indeed. The logic of all this is that getting people spending will pick the economy up and (via VAT etc.) generate money for the gov. to pay the national debt costs. So we want inflation to discourage waiting to spend and low interest rates to discourage saving; a pushmepullyou arrangement.

      But after surging to >10% after the crunch, savings rates have dropped to 4.7% of disposable income (and that 4.7% is being eaten away by the silent inflation of rent increases). In other words, there’s not much left to spend unless the banks can force people to spend, which is what negative retail rates really would be trying to do. But there’s no way to prevent the savers from simply sticking it under the mattress, as paper or gold. At which point, all the banks will be is potential retail development space.

      • It would not surprise me if a move was made to ban cash, or at least reduce the availability of large denomination banknotes.

        Don’t forget the debt is ratcheting up day by day and desperate times may call for desperate measures. On the other hand will it work…….? Frankly I think not.

      • ‘Also it is surely obvious that if retail depositors are faced with significant negative rates then they may well respond by converting deposits to paper money which is tantamount to a bank run if large numbers do this.’

        ‘ But there’s no way to prevent the savers from simply sticking it under the mattress, as paper or gold.’

        I’m not sure it’s that obvious to people with rocket science degrees.

        We’ve seen falling rates for 7 years and falling velocity for 7 years and yet still they want to print money.

        Definition of insanity is doing the same mistake twice and expecting a different outcome

        • Of course you are right but what does amaze me is that TPTB must know that this hasn’t worked and may never work and the insanity is there for all to see – and many now do see this – and yet they still persist!

    • indeed they are reluctant as I’ve posit’ed before

      soon as I and many others find our savings affected or current accounts ….


      or capital controls will be needed

      or a forced move to full electronic money ” for the good of the country”

      Negative rates are for CB and pensions funds and are to fight currency wars

      Shaun has already posted about the rise again of hard assets such as housing …. something rotten here

      And we all know what happened to pension funds in other countries

      Have the Irish got their raid back yet ?

      Interesting times

      And why are any CB surprised these days after the prime example of Japan for the past 20 years??

      Best get some more popcorn in


  6. Shaun, I admire your acute analysis of economics but are we not witnessing the complete failure of Friedmanite monetary economics ?

    • We witnessed that 30 – 35 years ago as Thatcher trashed the economy in the late 80’s via excessive loosening, leading to overheating, leading to excessive tightening leading to the economy blowing up. Everyone, except me failed to recognise the failure of Friedman’s purist and puerile policies at that time.

    • Hi Patrick J and welcome to the comments section

      Pretty much every economic theory has been damaged. As to Milton Friedman if he was alive he would struggle to be able to persist with his monetary theory with the way that we have seen velocity drop in the situation in which we find ourselves. However his theory of adaptive expectations still works especially if you use it for the real world and rational expectations for the financial one.

  7. Shaun, your column was hilarious. I especially liked the very appropriate David Bowie quote (“putting out fire with gasoline”).

    The Bank of Canada issued its October Monetary Policy Report on Wednesday. I had left a previous comment saying that the PBO retabulation of the 2015-6 budget balance, taking it from a surplus to a deficit of $1 billion, would probably have showed a smaller deficit or a surplus if based on new projections. This is not the case. While the Bank of Canada did raise its projection for 2015Q3 from 1.5% to 2.5%, pretty much as I thought, it lowered its forecasts for the rest of the fiscal year, so that the annual real GDP growth rate for 2016Q1 is now forecast to be 1.4% instead of 1.5%. These estimates do not, of course, take into account the fiscal stimulus promised by the PM Designate, Justin Trudeau. The 2015-6 budget balance belongs to the Harper government, not the incoming Trudeau government, but given things are so finely balanced, I would imagine that the Liberals will do everything they can to push money out the door before April 1 so that they can not be accused of turning a Conservative surplus into a string of Liberal deficits.

    I went to an election post-mortem sponsored by the Ottawa Economics Association on Wednesday and Ian Lee, a professor at Carleton University, predicted that Bill Morneau, the newly elected Liberal MP from Toronto Centre, will be the next Finance Minister and not the Finance critic in the last parliament, Scott Brison. It was at Mr. Brison’s home that Mark Carney and his family vacationed in the summer of 2012. Mr. Morneau has no political experience but has been a very successful Toronto businessman and was the head of one of Canada’s major economic think tanks.

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