News

European Central Bank Hopes to Stop Deflation, Yet It “Cannot Print Confidence”

The European Central Bank is boosting its bond-buying program as worries about deflation increase.

Here's an excerpt from a June 5 Bloomberg article:

Fears of deflation justified the European Central Bank's decision to ramp up its emergency bond-buying program, according to policy maker Pablo Hernandez de Cos.

"Deflationary risks have increased and that's one of the reasons the European Central Bank is taking the action it is taking -- to ensure that risk doesn't materialize," the Governing Council member and Bank of Spain head said in a Bloomberg News interview in Madrid. "I'm among those who think that this crisis is essentially disinflationary, in the sense that some of the problems we had with low inflation are accumulating."

That view was echoed on Friday by Executive Board member Fabio Panetta, who told Italy's Radio 1 that coronavirus lockdowns have led to a "resurgence of deflationary pressures."

The comments highlight the fear that the pandemic could tip the euro area into a Depression-like spiral of falling prices and wages if the hit to the economy isn't countered. The ECB's actions on Thursday were the latest in an unprecedented series of spending measures by authorities to save jobs and keep companies afloat.

Hernandez de Cos said demand will remain weak in coming months even as lockdown measures are lifted. Consumers are likely to stay cautious and continue to save as they worry about losing their jobs or the threat of a new coronavirus outbreak, he said, citing a high correlation between joblessness and savings rates in Spain.

The ECB boosted its pandemic bond-buying program by 600 billion euros ($680 billion) to 1.35 trillion euros, and extended it until at least June 2021. Those purchases will go a long way toward soaking up the massive debt burdens the governments are building, though economists have already started to say it'll need to do more later this year.

However, as Elliott Wave International's analysts have long held, central banks are powerless to stop deflation.

Elliott Wave International's May Global Market Perspective noted:

Central banks are printing money to buy bonds from governments and the private sector in a desperate effort to keep the economy afloat. The Federal Reserve and even the European Central Bank are now buying junk bonds, essentially bailing out bond holders with money magically digitalized out of thin air. Their hope is, of course, that this new magic money will trickle down into the real economy. It didn't after the last QE, merely fueling asset prices higher. We know it's dangerous to say, but this time is different. This time, confidence has evaporated, and central banks cannot print confidence.