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ECB Cuts Deposit Rate to Negative 0.1 Percent


txlaw
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Yes. I'm glad that Draghi realizes that Europe's main risk is in fact deflation and acts accordingly – and independently from Germany's stupid position.

 

Yep, there is a German professor who is stirring the public debate against mutualizing some of the peripheral debts. The German public needs to understand that their high level of employment depends on selling goods to some people that can't afford to pay them back.

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Yes. I'm glad that Draghi realizes that Europe's main risk is in fact deflation and acts accordingly – and independently from Germany's stupid position.

 

Thank you, ni-co! I really appreciate this! We are suffocating here in the south… and it is not just because of the summer heat!! ;D ;D

 

Gio

 

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Yes. I'm glad that Draghi realizes that Europe's main risk is in fact deflation and acts accordingly – and independently from Germany's stupid position.

 

Yep, there is a German professor who is stirring the public debate against mutualizing some of the peripheral debts. The German public needs to understand that their high level of employment depends on selling goods to some people that can't afford to pay them back.

 

Seriously? You are saying its the Germans fault that there are countries and their citizens who have been spending money they don't have and buying things they cant afford?

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How is that even possible? Depositors would flee the banks and store their money anywhere else... Can someone explain how this would work?

 

BeerBaron

 

Thats the IMO dumb plan it seems like. Lets hurt the sensible people who saved. Lets force them to spend, inflate real estate/stock/bond prices.

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Seriously? You are saying its the Germans fault that there are countries and their citizens who have been spending money they don't have and buying things they cant afford?

 

No. He is saying that prices are information. When prices get distorted for a very long time, like we have had in Europe since the Euro was ill-advisedly introduced, information get to be very misleading. When information are misleading, people make very bad decisions. And bad decisions have the nasty habit of compounding their nefarious effects.

We all agree Italy and Spain , also France I guess, must clear their own houses and start behaving responsibly and reliably. But what doesn’t work must be fixed: a monetary union, without a political and fiscal union has never worked. Show me one single example in history…

By the way, I am not saying what Draghi is doing will work… In fact, I think it is only a palliative…

 

Gio

 

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germany was the reason bad decisions were made at the beginning of the crisis. landesbanken would've said "PUFF" as a great mind said if we(the eu) wouldn't have bailed everybody out.

 

so it's not the germans fault they spent so much money but it's kind of hypocritical to blame their under-capitalized banks on greeks, or italians.

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I don´t believe there will be big deflation in the euro zone. In Greece there is some deflation.

Munger once said that Japan got Deflation because of the psychology of the Japanese people and Japanese people didn´t take any risks anymore. This is not happening in the US oder Europe.

Buffett once said that he doesn't´t think deflation will happen in the US.

John Templetion once said that most people won´t see deflation in their life time.

Since I live in the euro zone, everybody around me is spending like crazy and it is understandable and make sense with this low interest rates.

 

It simply doesn´t look like deflation.  ;)

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If each European still had their own currency, their currency would've devalued and their people's purchasing power would've decreased. To approximate a devaluation through austerity creates too much drama and human emotions. Deflation is the consequence of austerity. Stand in the shoes of an unemployed 20 something, he doesn't have a job, he doesn't see much future, so he is living in the moment. How will he increase his productivity 20 years down the road? How will he has the earning power to spend? Historically, too much debt usually gets wiped out through default, inflation and/or devaluation - lending money to deadbeats is almost always a bad idea longer term.

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Seriously? You are saying its the Germans fault that there are countries and their citizens who have been spending money they don't have and buying things they cant afford?

 

No. He is saying that prices are information. When prices get distorted for a very long time, like we have had in Europe since the Euro was ill-advisedly introduced, information get to be very misleading. When information are misleading, people make very bad decisions. And bad decisions have the nasty habit of compounding their nefarious effects.

We all agree Italy and Spain , also France I guess, must clear their own houses and start behaving responsibly and reliably. But what doesn’t work must be fixed: a monetary union, without a political and fiscal union has never worked. Show me one single example in history…

By the way, I am not saying what Draghi is doing will work… In fact, I think it is only a palliative…

 

Gio

 

When Germany agreed to allow countries like Greece and Spain to join the EU the result was these countries were extended a "triple A" credit rating.  This enabled a country like Greece to go on a spending binge with a credit rating they would never otherwise ever had. And lets be honest - Germany, which was no longer competitive globally because of countries like China,  benefited for years by selling Greece and other countries within the EU goods on credit.  Now fast forward to the financial crisis, Germany again benefited when the Euro fell as Germany was once again competitive globally.

 

Now I am not saying that countries like Greece, Spain and France are blameless - and yes they do need to get their financial house in order - but Germany is acting rather hypocritically. Germany benefited from the entire process and helped enable the entire process. Now that the Euro has once again risen (to the point Germany is less competitive globally) Germany is complaining about the result. 

 

IMHO this is Europe's version of the US housing crisis but instead of giving don't ask, don't tell mortgages to people who couldn't afford them credit was extended to countries who have little or no hope of ever paying it back.

 

My $0.02

 

cheers

Zorro

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One of my favorite movie lines is from the movie Rising Sun: "Fix the problem, not the blame."

 

Unfortunately, I don't know how to fix the problem without breaking the Euro currency bloc apart because a more intimate Europe is not in the cards. I only know that austerity is no solution at all and I think of the German course as a very dangerous one.

 

Completely agree, Gio, that Draghi's actions take only palliative effects.

 

Interestingly, both George Soros and Ray Dalio think that Germany leaving the Euro is one of the more probable outcomes:

 

http://blogs.wsj.com/marketbeat/2012/09/12/ray-dalio-southern-europe-is-about-to-enter-a-lost-decade/ and http://www.cnbc.com/id/100629323

 

Munger once said that Japan got Deflation because of the psychology of the Japanese people and Japanese people didn´t take any risks anymore. This is not happening in the US oder Europe.

 

If you're looking for some risk averse people outside Japan, Germany might very well be the place you're going to find them.

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"If you're looking for some risk averse people outside Japan, Germany might very well be the place you're going to find them."

 

I mean business people who are incentivied from low interest rates, not politicians.  :)

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I think this is going to help Europe.  This worked in Sweden in the Depression, it is working in the US/UK today why will it not work in Europe?  My biggest concern was deflation in Europe but with this I think that concern is less.  One thing that helps monetary stimulus is an efficient way to deal with debtors (which the US/UK has the best system followed by Europe then Japan). 

 

Also if you look at the Euro there are very incentives to keep the system as is.  If Germany and other strong nations form there own block they will make themselves uncompetitive.  So the strong countries have a huge incentive to stay.  The weaker countries also have an incentive to stay, the exit would drive there economy off a cliff.  What incentives are out there stronger than these that would cause a rift?

 

Packer

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"Interestingly, both George Soros and Ray Dalio think that Germany leaving the Euro is one of the more probable outcomes"

 

Interestingly George Soros is investing in Spanish real estate. George Soros has always the tendency to describe ultimate worst cases. It is often more important to look what the gurus do, than what they write.  ;)

 

I was in March in Spain and I also think Spanish real estate has very good return potential over the next five years.  :)

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"Interestingly, both George Soros and Ray Dalio think that Germany leaving the Euro is one of the more probable outcomes"

 

Interestingly George Soros is investing in Spanish real estate. George Soros has always the tendency to describe ultimate worst cases. It is often more important to look what the gurus do, than what they write.  ;)

 

I was in March in Spain and I also think Spanish real estate has very good return potential over the next five years.  :)

 

I don't think that this is contradictory. Why should Germany leaving the Euro be bad for Spanish RE?

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The weaker countries also have an incentive to stay, the exit would drive there economy off a cliff. 

 

Packer, why???

As soon as England got off the gold standard in the ‘30s, its economy blossomed rather than falling off a cliff… The same happened to France a few years later…

 

As I have always said, I am not sure I would compare something so small as Sweden’s economy during the Depression to something so big as US economy today… When the Fed’s actions have inflated asset prices so much more than they have improved the economy, I guess the final outcome is still unknown… But here is the old debate between Austrians and Keynesians, right? We all know that, and it is totally pointless to resume here a diatribe that probably would never be solved… Actually, I have my own solution: they both are right! What the Austrians suggest will come to pass sooner or later… but it is much better later than sooner! That’s why what the Keynesians suggest is also so much useful: because it is helpful to spread the pain over the course of many years, instead of concentrating it in a short, and therefore unbearable, amount of time. But that’s only my opinion and is totally inconsequential.

 

What really matters is that Europe is different: we have a common currency, without a political nor a fiscal union… this simply cannot go on forever… and you very well know what Herbert Stein had to say about things that cannot go on forever! ;)

 

Gio

 

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"I don't think that this is contradictory. Why should Germany leaving the Euro be bad for Spanish RE?"

 

you are probably right that it is not contradictory, but I think it will politically not happen that Germany leaves the Euro.  ;)

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The scenario for a leaver would be grim due two factors (one short-term and one longer term).  The short term issue is the loss of savings for many of leaver's countries citizens and the collapse of the banking system.  This would have a huge disruptive effect on that country's economy.  This would be more disruptive than removing a peg which countries have done in the past.  The second one is incentives to reform (more tax collection, lower state benefits and sale of state assets).  Staying in the  Euro keep the reforms on track but leaving provides no incentive to continue.  It is also not to good for the remaining stronger countries as it makes there goods and services more expensive versus international rivals.  If these countries did not export much this would be a reason to split the Euro.  Thusfar, the political will still appears to be there for union as are the economic incentives.   

 

Packer

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How is that even possible? Depositors would flee the banks and store their money anywhere else... Can someone explain how this would work?

 

BeerBaron

 

My pedestrian perspective:

 

The negative rate is only on reserves held at the ECB, not depositors.  The negative rate will most likely push banks to lend to each other rather than storing reserves at the ECB.  I do not think this policy will do much.

 

Imo, additional capital needs to be added by someone (either private or ECB).  I would like to see some initiatives in the ABS world and I would also like to see more aggressive debt plans, either mods or charge offs.  As bad as the FC moratorium is here, I think we dealt with bad debts as a whole way better than Europe.

 

I have not spent too much time on Europe so someone please point out any flaws above. Thanks.

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What really matters is that Europe is different: we have a common currency, without a political nor a fiscal union… this simply cannot go on forever… and you very well know what Herbert Stein had to say about things that cannot go on forever! ;)

 

I agree completely, only adding that European politicians tend to underestimate market forces and vastly overestimate the efficacy of their possible courses of action.

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"Quote from: giofranchi on Today at 02:22:30 AM

What really matters is that Europe is different: we have a common currency, without a political nor a fiscal union… this simply cannot go on forever… and you very well know what Herbert Stein had to say about things that cannot go on forever! ;)

 

I agree completely, only adding that European politicians tend to underestimate market forces and vastly overestimate the efficacy of their possible courses of action."

 

Munger said that he thinks Europe will muddle through. Europe did so in the past and I think it will do so in the future.  ;)

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