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
Leave a comment if you have any questions—I read them all!