What is the ECB thinking?

[DAVOUT]

Originally posted by Kidicious


How are you measuring intrinsic strength? It's also strong against the Yen. The European economy doesn't seem to be growing fast at all. There is one thing that is changing though. The financial markets are booming. If the economy doesn't grow though this will only be temporary. Here's a 6-month chart of the DAX.

As you said, the European economy is almost stagnant, and as far as the financial markets are concerned, over the last six months, we can hardly say that they are booming : we see it as a partial recovery after a sharp fall (exactly the same profile in the Paris stock exchange).

So, there is no reason for the Euro to become stronger under the influence of the economy.

[Kidlicious]

Originally posted by DAVOUT


As you said, the European economy is almost stagnant, and as far as the financial markets are concerned, over the last six months, we can hardly say that they are booming : we see it as a partial recovery after a sharp fall (exactly the same profile in the Paris stock exchange).

So, there is no reason for the Euro to become stronger under the influence of the economy.

You lost me. To me you would want a weaker currency to deal with those problems.

[el freako]

Originally posted by HershOstropoler
BEA uses hedonic deflators, the difference is estimated at about 0.5% per year.

Nice to see that my analysis has had an effect

I'm forecasting 8% to 9% growth in 2003-2006 for the US, but only 6% for the EU (unadjusted).

The EU economy tends to stay 1-2% below trend untill a boom happens (when it rapidly moves to 1-2% above trend), whereas the US tends to move more smoothly from bust to boom.

So I think the US will have several years of 3%-3.5% growth before next relapsing into recession whereas EU growth (as it is currently measured) will be 2%-2.5% for 3-4 years followed by a couple of years at 3%-4%.

As it is I expect that average reported growth rates for 2001-10 to be 2.9% for the US and 2.2% for the EU - that translates into a fall in the realtive US's GDP per head from 140% of the EU's in 2000 to 130% in 2010

[DAVOUT]

Originally posted by Kidicious


You lost me. To me you would want a weaker currency to deal with those problems.

I am trying to interpret what the ECB is doing.

As we have no influence on the way the US$ evolves, we do not react to its moves, and our decisions are only referring to the European economy. It could be different in the future, when the Euro will be a more significant reserve instrument, but I think that currently the ECB is refraining from overreacting to outside influences.

[Kidlicious]

Originally posted by DAVOUT


I am trying to interpret what the ECB is doing.

As we have no influence on the way the US$ evolves, we do not react to its moves, and our decisions are only referring to the European economy. It could be different in the future, when the Euro will be a more significant reserve instrument, but I think that currently the ECB is refraining from overreacting to outside influences.

In my opinion the ECB is trying to maintain a currency that is stronger than the Dollar to prevent capital flight. If they keep the inflation rate below 2% they can do this, since the Fed targets our inflation rate at about 3%. The problem is that there are heavy costs involved in decreasing the historical inflation rate. It shouldn't be forced, and I think that is what the ECB is trying to do. I don't see any reason for the ECB to keep interest rates where they are since the Euro already has sufficient strength against the Dollar. The only reason is to lower the inflation rate, and I see problems there.

[DAVOUT]

Originally posted by Kidicious


In my opinion the ECB is trying to maintain a currency that is stronger than the Dollar to prevent capital flight. If they keep the inflation rate below 2% they can do this, since the Fed targets our inflation rate at about 3%. The problem is that there are heavy costs involved in decreasing the historical inflation rate. It shouldn't be forced, and I think that is what the ECB is trying to do. I don't see any reason for the ECB to keep interest rates where they are since the Euro already has sufficient strength against the Dollar. The only reason is to lower the inflation rate, and I see problems there.

I cant remind if we ever had interests rates lower that the current ones, at least not during the last 50 years. We are in the unknown, and I am not sure that reducing again the rate would produce anything else that lowering inflation up to deflation, which is really the worst consequence possible.

I am badly impressed by the US monetary policy which reduced the rates without furthering the economy, but killing inflation, for the profit of bonds holders, and supposedly for helping the stock exchange to recover.

[Kidlicious]

Originally posted by DAVOUT
I cant remind if we ever had interests rates lower that the current ones, at least not during the last 50 years. We are in the unknown, and I am not sure that reducing again the rate would produce anything else that lowering inflation up to deflation, which is really the worst consequence possible.

I am badly impressed by the US monetary policy which reduced the rates without furthering the economy, but killing inflation, for the profit of bonds holders, and supposedly for helping the stock exchange to recover.

There is concern to worry, because interest rates are very low. I think there should be some coordination between the central banks to give a significant boost to the world economy before it's too late. Since interest rates are already low, small boosts are ineffective. The only policy left will be significant spending by our governments if we slip into a deflationary spiral and monetary policy doesn't work.

[HershOstropoler]

"I think there should be some coordination between the central banks to give a significant boost to the world economy before it's too late."

The last thing we need is another round of global reflation. We got that in 1987 and 1997/8, resulting in boom and bust. Another round of that, and the next bust could dig us into another depression.

[Kidlicious]

Originally posted by HershOstropoler
The last thing we need is another round of global reflation. We got that in 1987 and 1997/8, resulting in boom and bust. Another round of that, and the next bust could dig us into another depression.

There are always booms and busts. Sometimes you can delay them for awhile. A depression is a rare event caused by special circumstance, not just a little monetary stimulus.

[HershOstropoler]

And we're not talking about "a little" here. Japan is already ****ed from its late 80s experiment, the US in trouble from its 90s experiment. This reflation round would be at our expense then, I suppose?

[DAVOUT]

Originally posted by Kidicious


I think there should be some coordination between the central banks to give a significant boost to the world economy before it's too late.

I am not sure that a US institution is currently willing to coordinate with an Old Europe institution
And Tony Blair cannot help on that matter.

But even if it were politically possible, Central Banks must be selfish, and are, by design.

The next problem for the dollar, in the next few years, is probably that the main holder of US public debt will not be the Japan but China, and coordinating with China will certainly be a quite different thing than coordinating with Japan.

[Kidlicious]

Originally posted by HershOstropoler
And we're not talking about "a little" here. Japan is already ****ed from its late 80s experiment,

That was caused by corrupt banking practices.

Originally posted by HershOstropoler
the US in trouble from its 90s experiment.

The experiment that conitinued the longest expansion period in US history

Originally posted by HershOstropoler
This reflation round would be at our expense then, I suppose?

You are already in trouble. You need something to help you out.

[Kidlicious]

Originally posted by DAVOUT
The next problem for the dollar, in the next few years, is probably that the main holder of US public debt will not be the Japan but China, and coordinating with China will certainly be a quite different thing than coordinating with Japan.

I hope our CBs think differently. Could be dangerous if they don't. I think they get along better than our political leaders.

[HershOstropoler]

Kidicious:

"That was caused by corrupt banking practices."

Oh right, sure. How could I forget that, and that there's no corruption in US finance.

"The experiment that conitinued the longest expansion period in US history"

Oh my, a paultry 10 years. Can you repeat that without a bubble?

"You are already in trouble. You need something to help you out."

Yeah, but we're not all uncle Alans who believe that easy money solves every problem.

[Kidlicious]

Originally posted by HershOstropoler
"The experiment that conitinued the longest expansion period in US history"

Oh my, a paultry 10 years. Can you repeat that without a bubble?

The bubble existed long before it popped. Sure, the Fed could have raised interest rates high enough to pop it and cause a recession. But they aren't in the business of causing recessions. They are suppose to prevent recessions.