When you go down to the local pond to feed the ducks you usually take some bread crumbs along to toss out randomly. The symbolism to even the ducks is clear. There may be more to come.
ECB President Mario Draghi today made his long awaited visit to the media pond and he didn't disappoint. Draghi brought along some financial crumbs to feed the folks. Negative interest rates are just one of the stratagems Draghi coughed up.
The ECB rate has been at zero for a some time and after the Draghi announcement they are now at -10%, not an enamoring move to Germans. What this means is banks will have to pay to park their funds at the ECB or take their funds elsewhere like lending them out to families and businesses for a higher return but not a return without risks.
And therein lies the rub. It's about liquidity. The hope is-- and to be sure, at this point that's all it is, a hope--families and businesses will put that money to work creating more demand and along with it some hoped for inflation.
And let's not leave out what many believe is the over-valued euro. EU politicians and bureaucrats have been praying for a weaker euro to do their bidding for them and now they may get their wish. But markets can be perverse creatures sometimes, so the hourglass has been turned upside down and we will see.
Even before Draghi announced his plan the head of Germany's savings banks, Georg Fahrenschon, attacked the rate cut for causing Germans to save less in a nation where savers typically put away one-tenth of their income. A loss of savings by depositors is a loss of income for the savings banks, another indirect case of whose ox gets gored.
Fahrenschon's comments were directed at what's known as the Denmark experiment when in 2009 the tiny Scandinavian country engineered a economic turnaround with negative rates. The ECB spent months a while back studying the Denmark ploy. In some ways, therefore, Draghi's move is not a big surprise.
Taking the deposit rate below zero is something no major central bank has ever done. So if it works in this case the praise will be lavish. But if it doesn't you can expect heavy fallout. There are two main points here. First, all of this maneuvering will do little or nothing to correct the obvious structural defects in the EU, defects that many apparently choose to either ignore or deny.
The second main point is one investors should never take their eye off and that is how to make money from it. Recognize an opportunity when it arrives. To paraphrase Winston Churchill, if most people were walking down the street and opportunity came along and knocked them to the ground, they'd just get up, brush themselves off and keep walking.
It is not now and hopefully never will be sinful, un-American, anti-European or a crime against humanity to book a profit off the affairs of bumbling, stumbling politicians and bureaucrats who privately hold most of the human race in utter contempt.
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