The head of the European Central Bank (ECB), Mario Draghi, promised to do ‘whatever it takes’ and today he delivered–an absolutely stunning package of monetary madness that would have been unthinkable just a few short years ago.
Do ‘whatever it takes’ to accomplish what? Something got lost in the translation. The initial market reaction was a huge move up in the dollar, a move higher in European and US equities, lower bond yields and lower gold. Just what you would expect. Except one hour later, it was all reversed. The dollar had collapsed, gold was up, equities had lost their mojo and US Treasuries were down.
It now looks like Draghi’s famous bazooka was turned on himself and central bankers generally. The absolutely wild instability that resulted from the ECB’s announcement tells us something very important. In one sense, there was nothing new in the announcement–it was more of the same quack stuff that hasn’t worked before–just a lot more and more than expected. But the market reaction tells us something new–that markets no longer believe in central banks and monetary policy to resolve our huge debt problems and the slide into depression that is obviously occurring right in front of our eyes.
For your edification, here is a summary of what was announced by the ECB today:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting on 16 March 2016.
- The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, effective 16 March 2016.
- The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, effective 16 March 2016.
- The monthly purchases under the asset purchase programme will be expanded by €20 billion to €80 billion starting in April.
- Investment grade euro-denominated corporate bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.
- A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.
What does this all mean, dear reader? The market reaction tells you everything. The central banks have lost control and, in the process, they have destroyed their credibility. This is a watershed day. If you do not own gold, please understand that Draghi’s bazooka is also aimed at you.