European Central Bank poised to strengthen further monetary pumping

On January 21 2016 the European Central Bank (ECB) President Mario Draghi signaled that the governing council may provide more stimulus at its next meeting in March. The ECB President is of the view that the monetary stimulus undertaken by the central bank since June 2014 had strengthened the euro area’s resilience to recent global economic shocks. The yearly growth rate of the ECB balance sheet (monetary pumping) jumped from minus 8.5% in December 2014 to 31.3% by December 2015, whilst the policy rate of the ECB stood at a record low of 0.05%.

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Notwithstanding this, the president of the ECB holds that so far the central bank has failed to bring the rate of inflation to its target of around 2%.

A major factor behind this is a sharp fall in the price of oil, according to Draghi. The yearly growth rate of the CPI stood at 0.2% in December.

According to our model the growth rate could fall to minus 0.1% in December this year. By December next year we forecast a figure of 0.8%. Based on this it is quite likely that the ECB is going to further strengthen the pace of monetary pumping.

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A strong rebound in the growth momentum of our monetary measure for Eurozone AMS bodes well for economic activity in terms of industrial production in the months ahead (see chart).The loose monetary stance of the ECB is manifested in the strengthening of the momentum growth of Eurozone AMS with the yearly growth rate climbing to 13% in November 2015 from 6.5% in November 2014.

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We suggest that a further strengthening in monetary pumping by the ECB is only going to further strengthen various bubbles – wealth consuming activities.  Most mainstream economists and commentators regard monetary pumping as the correct policy to keep the economy “healthy”. For them an increase in money raises the demand for goods and services and via the famous Keynesian multiplier strengthens overall economic activity – demand creates supply. We suggest that this way of thinking is flawed since an increase in money supply always sets in motion an exchange of nothing for something. It is exactly the same dynamics that is generated by a money counterfeiter.

Whilst mainstream thinkers would likely oppose money counterfeiting they are totally supportive of monetary pumping by the central bank, which sets in place the same dynamics as a counterfeiter – impoverishment of wealth generators.

This thing can go on as long as the pool of real wealth is still growing but once it starts to stagnate or shrink then no pumping can boost general economic activity – the amount of real funding to support more false activities i.e. bubble activities, is not there.