In a 45-Minute Salvo today, the ECB cuts rates to a record low 0.75 percent and reduced the deposit rate to zero. Meanwhile, the People’s Bank of China cut their benchmark borrowing costs (the second time in a month), and the Bank of England raised the size of its asset-purchase program.
Also note the central banks of Australia, the Czech Republic, Kazakhstan, Vietnam and Israel cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.
ECB president Mario Draghi said these events were not global coordinated easing.
I am willing to take him for his word. Thus, it's safe to assume that what has transpired was more akin to global uncoordinated panic.
European Bond Market Response Was "Not Enough"
The market response to this 45-minute volley of coordinated easing was "not enough". One look at the bond market in Italy and Spain makes that point crystal clear.
Spain 10-Year Government Bond Yield
Italy 10-Year Government Bond Yield
Certainty vs. Uncertainty
Bloomberg reports ECB President Mario Draghi said “heightened uncertainty” was weighing on confidence. Draghi also said the council didn’t discuss other non-standard tools.
Clearly the market wanted "non-standard" tools such as more direct bond purchases. However, bond purchases are viewed by Germany as "monetary financing of government". Nonetheless, the ECB has done them before, over strenuous objections from the German central bank.
It is 100% certain Europe is in a recession and that recession will strengthen. It is also 100% certain the 19th summit solved nothing. So what is with all this talk about “heightened uncertainty”?
Meaning of Heightened Uncertainty
The words "heightened uncertainty" can be reasonably translated as "The economy is going to hell in a hand basket and we have no idea what to do about it".
Since the ECB and government officials cannot say that, nor can they says they are out of policy tools, they simply moan about "heightened uncertainty". Certainly they are uncertain about what to do, primarily because the problem at hand is not fixable.
Fed Uncertainty Principle
Now would be a good time to review the Fed Uncertainty Principle, especially corollaries one and two.
Corollary Number One:What I said about the Fed apples to central banks in general.
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two:
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Mike "Mish" Shedlock
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