I am attempting to come to grips with my thoughts on the successes of Draghi. And I think I am looking at him through the wrong set of eyeglasses.
Bernanke was measured by what he was able to accomplish for the American economy. He kept deflation (mostly) in check, and kept the US stock market from collapsing, even though it took until March 2009 for the trading public to believe him and start buying stocks.
Should Draghi be measured differently? It seems he is charged with keeping deflation in check also, but to keep the various European stock markets from falling in the future, he has promised to loosen the reins on credit. Without implementing anything, he has successfully jawboned the market into believing his rhetoric (we will do whatever it takes, part II) and promised future programs, like targeted long term repo ops, but the only real thing the bank did was to change the interest rate structure to one of charging interest on the banks who hold reserve funds overnight with the ECB (what would happen if other banks like the US Fed or the BOJ did that???)
Yes, just like in America, stocks welcomed the move in Europe and the DAX nearly surpassed the 10,000 level for the first time in its history. Is this what Draghi wanted? A picture of a growing economy by viewing the strength of stocks? If so, then he succeeded, and unlike Bernanke, he did not have to spend money to do it. Bernanke had to implement QE 3 times and spend FED money, Draghi just had to hint at it.
So why in my mind do I measure the success of Draghi by looking at the exchange rate? With the Euro strengthening on the move yesterday, I was thinking he failed. With a strong Euro, it makes manufactured products to be exported less competitive. But who does Europe export to? They mostly trade amongst their own member nations. So keeping European companies growing and their stocks strong may be Draghi’s objective. Bernanke was not measured on the strength of the US dollar, so why should Draghi be similarly measured? With their strong Euro, they certainly can buy more Chinese imported goods, which they seem to do a lot of, same as here in the US when our dollar experiences occasional bouts of strength.
So changing the filter on my glasses helped me see that Draghi is accomplishing what Europeans want him to do. It is not necessarily a race to see which central bank can weaken their currency the most so that manufactured goods can be competitive on a world landscape, it is what path is taken to ensure that the stock market or markets governed by that central bank can keep growing. In the case of Japan, those markets only grow by exports. In Europe and the US, those markets grow by having access to nearly free credit.
Bottom line, Draghi does not care about the strength of the Euro, so why do we here in America care? Why were so many analysts here in America criticizing him for it? I think I finally settled this in my mind. I thought I would share it all with you, too.
Steve Beilby
Wizetrade Analyst
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