Draghi Is History
Mario Draghi has left the chat. Eight years after putting his neck on the line for the Eurozone, the Italian chief of the European Central Bank (ECB) is waving goodbye to his responsibilities! Monetary policy might be dull as dishwater, but it moves stocks, and investors pour over it every day!
The separation between what something costs and what something is worth, matters. It’s human nature to go bug-eyed at the prospect of easy money, and that’s why price and value disconnect so often in market bubbles. Rationality ceases at that point, and eventually, there’s a day of reckoning. For all it’s worth, monetary policy is an economist’s attempt to loosen or tighten the money supply, to make business easier or harder to do, and thus to encourage or temper investors’ bug-eyed spirits. So, how has Europe’s economist, Mario Draghi, got on?
His first move in 2011 was to undo the rate hikes of his predecessor and make the stock market fizz. A year later, he found the euro in freefall and vowed to do “whatever it took” to keep the Eurozone together. He stuck to his word, and three years later, rates went sub-zero. There’s only so much fizz you can inject, however, so out of powder; he resorted to quantitative easing. It worked, kind of, but a protestor threw confetti at him for his troubles.
That was a defining moment. Perhaps, the beginning of the end. With investors complaining about Brexit uncertainty and slowdowns in European growth, Draghi complained that governments never helped him out, ramped up quantitative easing again. Today, inflation is nowhere near its target, but stocks are still alive, and their big market moves in the future won’t be his problem.
Christine Lagarde is next in line for the ECB job. She hasn’t been left with many unfired economic weapons to either encourage or temper investors’ animal spirits, so that will make for an interesting European backdrop for investors. Say what you will about monetary policy, it never stops the trades coming!
