Stunning: Not For 20 Years

by: Jeffrey Snider

By Jeffrey P. Snider

There was a time not all that long ago that it was great, maybe even thrilling, to be a central banker. The late 1990s had to have been the absolute apex, but the aftermath of the Panic of 2008 resurrected some of that lost luster. Undoubtedly that was due to great confusion over what had actually occurred, and thus lost in the extremities of the time was uniform central banker ineffectiveness. Very few, it seemed, cared what had happened as concern was almost totally focused upon getting out of the mess. Since central banks were all that occupied that space, so great hope and respect were restored or augmented by default.

Like global inflation rates, it has been almost steadily downhill since - particularly after the "unforeseen" recurrence in 2011. No matter what they try, central bankers cannot get the inflation and thus the recovery (orthodox economics assigns them as linked) they promise. They are "forced" to address this obvious shortfall with only "bigger" versions of more of the same. Each time they do, they only reveal that judgments about 2008 really should have been more inclusive, intrusive and far less deferential.

Markets that once jumped almost on command are insultingly uninterested now. Last year, the ECB added QE (PSPP) after it was claimed that the central bank had not done enough, always falling short of a full-blown QE that would surely do the trick. They did; it didn't. Now there is, predictably, only more of it with added bells and whistles that count more as a rebranding than new thinking or actual effort that might matter. It is, as I write occasionally, still the fingers crossed strategy.

Again, markets finally seem to be catching on to that reality:

There's no sign yet the European Central Bank's latest salvo against disinflation will work, market prices show. Euro-area inflation derivatives have sunk to new lows after President Mario Draghi unveiled last month measures from interest-rate cuts to expanded asset purchases, Bloomberg strategist Tanvir Sandhu writes.

The forward inflation-swap curve shows that the ECB's target to boost the pace of price increases to near 2 percent isn't expected to be met even in 20 years. The so-called HICPxT swap rates with one-year tenors beginning in the future flatten from the 10-year starting point onward, at around 1.7 percent.

Swap markets are by no means perfect or irrefutable, but this is utterly humiliating to a central bank that once enjoyed preeminent status and all the political groveling that came with it. The ECB's balance sheet swells by the minute with all kinds of different assets and programs and the swap market, perhaps the deepest and most attuned, is gravely unmoved - not for 20 years does it now expect the ECB to hit its target! What it really means is that swap markets are pricing a far more than non-trivial chance that the ECB has truly lost its long run inflation expectations "anchor."

What's worse, at his press conference today announcing really nothing new, ECB chief Mario Draghi admitted the problem without, apparently, figuring how that might reflect on all this.

"We have a mandate to pursue price stability for the whole of the eurozone not only for Germany," he said. "We obey the law, not the politicians, because we are independent as stated by the law."

"Low interest rates are a symptom of low growth and low inflation. If we want to return to higher interest rates we need to return to higher growth and higher inflation," he said.

Judging by the European swaps market, there is no expectation of a "return to higher growth" even in the more distant future; none. Again, it is a chastening rejection of the central core of central banking; if a central bank cannot meet its core inflation target it cannot really exist. They were once believed invincible, but have instead proven themselves beyond ineffective to the point of irrelevance.

That is the grandest of all positives out of this continued economic wreckage, but it is only one forward step among many that need to be yet taken. The next is far more immediate, namely that these people just will not stop; they cannot help themselves because, and it really is this simple, they will not envision a recovery that does not include their own glory in it. How many more years must this go on to be proven? No matter how little they succeed (and it used to be just the stock market, but it, too, no longer hears Pavlov's bell) they only answer with more of the same bigger and bigger.

The ECB is already almost two years into NIRP so the expanded QE gives them some excuse for time against what is surely the next escalation.

Speaking earlier, Draghi had sought to calm German fears, throwing cold water on helicopter money or similar ideas.

But he argued that there was little alternative to the ECB's course of money printing and low interest rates in a world where economic prospects were dim.

It is an absolute stunning argument because it presumes that nobody has the slightest memory of the past few years, let alone of the last almost decade now. How can we be living "in a world where economic prospects were dim?" We are awash in "stimulus" of every kind and format that has ever been conceived, save the "helicopter." They, central bankers, have entered Alice's Wonderland and the media offers nothing. As I wrote in February of the insistence over Europe's "needed" QE expansion:

In other words, because QE failed to work proponents have more ammunition to call for more of what already failed to work. Subtracting the orthodox bias would lead unambiguously in the opposite direction - it doesn't work, move on. As suggested at the outset, ideas put forth like this are the direct result of the whole thing coming apart, leaving the mainstream with no idea what to do. This is all the more confusing for them because QE in Europe really was no different than the LTRO's which were once so universally and emphatically celebrated but are now almost never mentioned.

The fact that "aggressive easing" hasn't worked does not argue immediately for its expansion, as it is instead evidence to cease all of it. Such a claim can only be within the realm of insanity or politics; and it is yet to be determined whether or not it has been to this point both. They will not stop no matter how much havoc they wreak; the dreams of their past golden years of universal acclaim are just too alluring. After all, they still have their jobs.