Macro Shop ECB White Paper:
The so called European “deflation” meme is in the air. The reality is that the European’s having been less aggressive in the printing department, are quite naturally suffering the consequences of importing deflation via a strengthening currency.
On Thursday, ECB governor Mario Draghi is widely expected to cut interest rates from their current 0.25% and push overnight deposit rates into negative territory to boost lending, and, in turn, stoke inflation from its current level of 0.5%, which represents a four-year low. They will also announce a new limited asset purchase program in an effort to stimulate consumption at the retail level and not tick off the German Wiemar zeitgeist at the same time.
One likely consequence of negative deposit rates is a drop in the euro’s exchange rate due to looser monetary conditions. Moreover, the ECB’s measures could transform the euro into a funding currency of choice. for a new carry trade.
So the macro shop’s take away is that the Euro soldier joins the currency war. It’s a zero sum game, and thus they will now export inflation to our shores by strengthening the USD. Moreover, the Japanese will have to match the devaluation so as not to give back the recent export gains achieved by Abenomics. Also, the Chinese Yuan has been depreciating quietly as well.
All of which is highly inflationary to the U.S.’s 70% consumption / import based economy.
DEATHFLATION: No global growth – Persistent High asset prices – Inflation via competitive currency devaluation
As for the market, it will react in an exuberant knee jerk reaction to the Euro Easenomics, initially spiking higher. However, once all the giddy-up equity idiots realize that this is a zero sum game, and does nothing to stimulate global growth, we will have a reversal, which will only gain steam in the months ahead, as the no growth Deathflation paradigm begins to take its deadly toll on us ALL.
Blow us, you’re lucky to know us………………..