Europe Slowly Sinks Further Into the Abyss of Timidity

Europe’s grand experiment in negative interest rates is about to get a teensy bit grander, but not everyone is happy about it:

Analysts and portfolio managers said they remain skeptical about the efficacy of negative interest rates in stimulating growth and inflation. “The key difference this time is that the market is much less receptive to the idea of the ECB generating inflation than they were a year ago,” said Jack Kelly, head of global government-bond funds at Standard Life Investments.

….Markets anticipate that the bank will lower the interest rate it pays on overnight commercial bank deposits by 0.1 percentage point in March, to minus 0.4%, investors say.

It has long been taken as axiomatic that a motivated central bank can generate inflation whenever it wants. But is this true? In theory, it still is: if a central bank creates a vast enough pool of new money, eventually inflation has to follow. But in the real world, there are political limits to just how vast such an expansion can be, as well as plain old limits on the amount of nerve that central bankers have. So now the question is whether it’s still true in practice that a central bank can generate inflation at will. It sure looks like the answer might be no. And if that’s the case, there are also limits on the amount of monetary stimulus that a central bank can provide.

And if that’s true, then the only way out of Europe’s hole is with fiscal stimulus: lots of countries running big deficits for a good long time. But that doesn’t seem to be in the cards either. And so we’re stuck.


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