Suspension Of Disbelief – Only In The Other Direction

For years, DM central banks have been forced to kind of suspend disbelief with regard to inflation and other incoming econ data in order to persist in the fantasy that printing trillions in fiat scrip was good for something other than inflating bubbles in financial assets.

I’m sure it wasn’t lost on them (well, it was and still is lost on Kuroda, but he’s quickly becoming the guy whose name is always followed by the word “notwithstanding” in these discussions) that what they were doing wasn’t generally working, but you’re kind of pot-committed at a certain point, right? I mean once you’ve gone and printed $20 some odd trillion to buy up a bunch of assets, it’s a pretty hard turn to make to go out in front of the public and say “well, it doesn’t look like this is going to work after all.”

And although it’s still not generally “working” as far as the real economy goes, it’s as close to working as it’s going to get in Europe. Witness this morning’s inflation data. Here’s Bloomberg:

Inflation in the euro area picked up more than economists predicted though underlying cost pressures failed to accelerate, underscoring the European Central Bank’s struggle for price stability just days before officials debate the future of their stimulus program.

Consumer prices rose 1.5 percent in August after 1.3 percent in July, the European Union’s statistics office said on Thursday. That’s the highest reading in four months and exceeds the median forecast of 1.4 percent in a Bloomberg survey.


That’s still below target, but it’s not terrible and when you combine it with the other half-decent econ we’ve seen out of Europe, what you’re left with is a Mario Draghi who now finds himself in the strange position of having to suspend disbelief in the other direction.

That is, with the euro surging and with the political turmoil in Washington casting considerable doubt on the prospects for the U.S. economy, the ECB now needs to pretend like things are going worse than they actually are in order to justify a slower pace of policy normalization.

Because if they were to come out next week and say something like “look, obviously things are looking better and it seems like Merkel is going to get reelected, so it’s time to start rolling back this stimulus, thank you everyone, have a nice day,” EURUSD would soar through the fucking roof.

I mean hell, just yesterday we learned that eurozone economic confidence is sitting at the highest level in ten years:


So this is the policymakers’ paradox in a world where everyone is engaged in the same easing effort. Unless everyone involved sees their economies move in the same direction at the same time and at the same pace, any “success” you have is going to immediately make you the “winner” in the eyes of FX markets which will promptly “reward” you for your efforts by driving your currency higher.

That, in turn, is a double pain in the ass. Because in the short-term it puts policymakers in the position of having to explain why things aren’t actually as good as they appear thus necessitating a slower pace of normalization than they would ideally like to see, and in the long-term, if nothing is done, the currency gains end up negating the very economic benefits that served as the rationale for FX markets to choose you as the “winner” in the first place.

Good luck with that.



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