September 13, 2014


Shift change at global central banks

ECB money printing should provide continued relief for Canadian borrowers


Good web printing presses are multi-million investments. That means businesses often need to operate them 24 hours a day to keep them profitable. In the more efficient companies, departing workers don’t even bother to shut them down at the end of their shifts. They simply hand over the controls over to the new arrivals. The global central bank money printers appear to operate similarly.


At least that is what could infer from the European Central Bank’s recent announcement that its latest round of asset purchases will begin in October, just around the time that US Federal Reserve tapering of its own program is projected to wrap up. The program, which was unveiled by Mario Draghi, the EBC’s chairman earlier this month, also calls for an astonishing -0.20 percent negative interest rate on European banks than park funds there.


European asset seizures could benefit Canada

Put another way, the European Central Bank will henceforth seize -0.20 percent of its banking sector depositors’ assets each year, a stunning, development, pretty much unheard of in modern times. The idea is to “encourage” European banks to lend out money that they otherwise would not have, because the alternative is to have it fritter away.


That policy, weird though it may be, could prove beneficial for Canadian borrowers, many of whom have been slipping deeper in hock. According to Statistics Canada, household credit market debt in Canada rose to 163 percent of personal income, near the levels reached in the United States just prior to its financial collapse.


The good news is that if European policy interest rates remain negative, investors will be unlikely to shift Canadian funds there, indeed the reverse may occur. That means the Bank of Canada, which last week announced that it was maintaining its own policy rate at 1.0 percent, will be under less pressure to increase rates any time soon and indeed may be even able to cut them further if it so chooses.


This will provide continued support for the Canadian jobs market which actually shed 11,000 posts last month. Canadian housing, which is heavily reliant on low interest rates to keep prices firm will also benefit.


Will seizures of personal accounts be next?

That said, from a broader perspective, Canadians would be wise to follow closely the European Central Bank’s increasingly desperate actions to spur growth. Because while the -0.20% annual rate that the monetary authority is charging banks that keep their funds there seems low, if it does not encourage those banks to lend more, there is nothing stopping the ECB from boosting that rate to -1.0 percent, to -2.0 percent or even higher. If that happens, the banks in turn could be forced to charge consumers to keep their money there.


True we are a long way away from that. However the record of the Ivy League economists who are currently running global central banks in recent years has been particularly damning. Their solution to almost every problem during the past quarter century dating back to the crash of 1987, the Long Term Capital Management collapse of 1998, the bursting of the Internet Bubble and the 2008 financial crisis has been to cut interest rates.


Now, with no more room to cut, the ECB has opted for negative rates. How far that policy will go remains to be seen.







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