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It is hard to imagine clear-headed people who would argue the efforts of the European Central Bank (ECB) to stimulate Europe’s economy have been very successful. Many might even argue the ECB has failed to boost the economy on the continent in a meaningful way, despite unprecedented intervention measures.
Central bankers usually have two choices when unprecedented economic stimulus measures fail, 1) abandon them, or 2) double down. At the FT, BlackRock’s chief investment officer of global fixed-income, Rick Rieder, encourages the ECB to double down in a big way. Rieder starts out strong. He’s not wrong when he writes:
First, policymakers underestimate the damage that the policy of abnormally low-for-long interest rates causes to the banking, insurance and pension systems. These are the hubs of financing and investment in any economy, particularly one with an ageing demographic in need of income-generating investments. European banks are being punished by negative rates, which compress net interest margins and hinder economic multipliers.
Low rates have punished banks, as well as savers. After this keen observation, however, it becomes harder to agree with Rieder. Rather than argue for a return to rate normalcy, he suggests following Japan into another emergency monetary policy that, so far, hasn’t been proved to work anywhere: purchasing equities. Rieder writes:
A key part of the solution would be to stimulate demand for capital, not to further lower the cost of debt. Having nearly exhausted its options on the debt side, the ECB should consider expanding QE to include equity investments to lower the cost of equity for European enterprises. That could narrow the abnormally large spread between the cost of capital and the economic growth rate. Lowering the cost of equity would stimulate growth through organic channels of investment, including research and development, which can provide durable economic gains.
The Bank of Japan has also purchased equities as a policy tool, with debatable benefit. However, the European economy is in many respects different than that of Japan. Europe has attractive terms of trade and strong capital inflows; wage inflation and the employment trajectory are better; and while European demographics are a headwind, they are not as bad as those in Japan.
While it is easy to understand how the ECB buying equities would benefit Rieder and BlackRock, the world’s largest asset manager, it is difficult to see how distorting capital markets on the equity side will help any more than distorting them on the fixed income side.
Jeremy Jones, CFA
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