Enter the Draghi

Markets today broadly cheered the audacious quantitative easing program of the European Central Bank. S&P 500 advanced 1.5%, while NASDAQ rocketed higher by 1.8%. Here is the report from the Wall Street Journal on the details of the program.

Mr. Draghi said the ECB will buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds. The purchases of government bonds and those issued by European institutions such as the European Investment Bank will start in March and are intended to run through to September 2016. Mr. Draghi signaled the purchases could extend further if the ECB isn’t meeting its inflation target of just below 2%. In December, consumer prices fell 0.2% in December on an annual basis in the eurozone, the first drop in over five years.
When asked if such an expansion of ECB’s monetary policy would stoke inflation down the road, Mr Draghi correctly pointed out that easy money policy around the world had so far failed to produce any measurable sign of inflation and quipped, “There must be a statute of limitations for those who say there will be inflation,”

Indeed, we do not know if ECB’s latest escalation of its monetary policy would ultimately lead to inflation. Even though Mr. Draghi answered negatively to the reporter’s inflation probe; surely, he must believe it can since the explicit goal of the latest round of QE is to bring inflation up to around 2%. By answering to the negative, he was implying not only the ECB can bring inflation up, but it can also control it at 2%. Whether such hubris is warranted is a debate for another day, it is certainly true that QE has been extremely effective creating asset inflation, which explains the market’s enthusiasm.

In the era of paper currency, central bankers are uniquely powerful to deal with the issue of deflation. Yet massive money creation has only produced asset inflation, not goods inflation. It must have been a puzzle to both advocates and critics alike. While investors enjoy the collateral benefit of easy money, I think the time to fear is when Mr. Draghi actually succeeds.

Once there was a banker named Greenspan. He came to the rescue of the stock market whenever it teetered or tripped. It came to be known as the Greenspan put. Then arrived his protégé Bernanke who carried on such tradition with aplomb. Now Mr. Draghi has taken over the mantel. So the gospel of Greenspan has finally reached the end of Earth.

As I hearkened back to my high school days in China, waving his little red book and quoting Karl Marx, My Political Science teacher would say, “Who will educate the educators?” Could our intrepid market heroes ever teeter or trip? Who then will rescue the rescuers?