Draghi’d Forward

Exceeds expectations.

Photo: Frankfurt Skyline; Source: Wiki Commons/Thomas Wolf

That’s what I thought when I read about the European Central Bank’s program to expand the Eurozone’s money supply by buying government bonds, commonly known as quantitative easing (QE). A week ago, rumors were circulating that they would buy about €700 billion worth of bonds. But yesterday Mario Draghi announced that the program would be more than €1.1 trillion. Markets around the world rallied on the news.

The key to the program’s success is its open-ended nature. If inflation doesn’t pick up, the bank will just keep buying more bonds. This is important: if deflationary expectations set in, consumers and businesses have a tendency to hoard their cash, instead of investing it, retarding growth. By expanding the money supply, the ECB expects to raise inflation by about half a percent.

So Draghi finally initiated QE, amid a raft of fine print that assures investors that most purchases will be done by the national central banks, and will be limited to less than a third of each country’s debt issuance. QE has worked to stimulate growth in the US; it worked in England, it’s working in Japan. It’s time for the ECB to expand its balance sheet, instead of letting it shrink.

Source: Wall Street Journal

By announcing an open-ended trillion-euro-plus program, Draghi heeded one of the most basic rules for market success: over-deliver.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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By | 2017-07-17T12:23:07+00:00 January 23rd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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