The ECB is turning into the BoJ

This is ECB Chief Mario Draghi:

“Well, let me first just point out that I never mentioned deflation. Deflation is a generalised fall in the price level across sectors and it is self-sustaining. And so far we have not seen signs of deflation, neither at the euro area level nor at country level. We should also be very careful about not mixing up what is a normal price readjustment due to the restoration of competitiveness in some of these countries. They will necessarily have to go through a re-adjustment of prices. We should not confuse this readjustment of prices, which is actually welcome, with deflation. Basically, we see price behaviour in line with our medium-term objectives. So, we see price stability over the medium term. Also consider that monetary policy is already very accommodative, consider the very low level of interest rates and that real interest rates are negative in a large part of the euro area…”

When I read Draghi’s comments the first thing I came to think of was how much this sounds like comments from Bank of Japan officials over the last 15 years.

Maybe Mario Draghi would be interested in this graph. It show the growth of broad money in the euro zone and Japan. I have constructed the graph so the growth of money peaks more or less at the same time in the graph for Japan and the euro zone. M2 growth peaked around 1990 in Japan and 2008 in the euro zone. The graph clearly shows both the boom and the bust and for Japan a very long period – more than a decade – of very low money supply growth.

I basically hate this kind of graph but the similarity is hard to miss. If Mario Draghi thinks euro zone monetary policy is “accommodative” today then he would also have to think Japanese monetary policy was accommodative in 1994-94.

BUT worse if the ECB continues on it’s present path it will likely repeat the mistakes of the BoJ and then we might be in for years of deflation. I know that this is not what Draghi wants, but the ECB’s present policy is unfortunately not giving much hope that a Japanese scenario can be avoided.

By the way that is the real reason for the slump we are seeing in global stock markets these days and it likely has very little to do with Obama’s reelection and the fear of the “fiscal cliff”. It is mostly about the escalation of bad news out of Europe. I hope Draghi will soon realize that unless he shows some Rooseveltian Resolve then the bad news will continue for another decade.

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  1. Draghi is a prisoner of the Germans. He sold his soul to them to become president. He should be swapped for Monti.

  2. Daniel Pfndler

     /  November 9, 2012

    I loved this part of Draghi’s introductory statements: “Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes owing to the need for fiscal consolidation.” Tighter fiscal policy = higher inflation = more restrictive monetary policy=not good. As I have written in my earlier email this week, out of the 1.5% core inflation 0,8% currently stems from fiscal tightening steps (higher administered prices, higher taxes). Hence “real” inflation is only 0.7% for the Eurozone overall and even slightly negative in Spain….With 0% inflation and 10y bond yields close to 6% you have a real yield of 6%. No country can cope with that for long and no wonder loans to non-financial corporates are collapsing. Spain should seek ESM help to activate the ESM now, however, they dont seem to want to… Best Daniel


  3. JJA

     /  November 10, 2012


    This post is very important, although it scares me more that I would like to admit. I cannot find a fault in your line of thinking and that makes me to feel really nervous. Talk about showing the impeding doom by showing the numbers.

    Scary stuff. That is as being a citizen of an Eurozone country.


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