3 QE

[AtW]

"The European Central Bank is considering three possible options for buying government bonds ahead of its January 22 policy meeting, according to reports.

As fears grow that cheaper oil will tip the eurozone into deflation, speculation is rife that the ECB will unveil plans for mass purchases of eurozone government bonds with new money, a policy known as quantitative easing, as soon as this month.

According to the Dutch newspaper Het Financieele Dagblad, one option officials are considering is to pump liquidity into the financial system by having the ECB itself buy government bonds in a quantity proportionate to the given member state's shareholding in the central bank.

A second option is for the ECB to buy only triple-A rated government bonds, driving their yields down to zero or into negative territory. The hope is that this would push investors into buying riskier sovereign and corporate debt.

The third option is similar to the first, but national central banks would do the buying, meaning that the risk would "in principle" remain with the country in question, the paper said. "

ECB 'looking at three QE options' - Telegraph


There will be no AtW's comment on this one.

[xoggoth]

As fears grow that cheaper oil will tip the eurozone into deflation

Eeeeh! As have said many times before, I never understand the economic issues.

But from a simplistic viewpoint, surely deflation is only bad when it is caused by collapse of an economy, a reduction of prices by internal suppliers and businesses desperate to sell in a shrinking market? Surely, when it is due to an external source, when it is foreign suppliers who are seeing the reduction in income, when reduced costs to ourselves can be used for increased investment and spending elsewhere, it isn't bad at all?

Can any economic experts to this economic idiot explain how low oil process are bad for Europe?

[xoggoth]

There will be no AtW's comment on this one.

aTw has appointed me to represent him in any further responses.

Wibble, wibble, wibble. Squirrels.

[zemoxyl]

Can any economic experts to this economic idiot explain how low oil PRICES are bad for Europe?

It's not the low price of oil that is the problem per se ( in the short term this causes a boost to the economy) , but rather it's because prices of oil are declining. Supply is greater than demand. A weak demand for energy and transport is preceived as declining economic activity. Oil is not a commodity that is greatly stored.

There are of course several political forces at work in oil production at the moment too. European producers like the UK and Norway as exporters, are the ones taking the hit from the reduced tax revenue stream and balance of payment issues. All the others as importers have lower debits in their country's current account.

Also in a deflationary environment, an entity's debt can be seen to be increasing with time. The opposite is the case in a mildly infaltionary environment.

Real life example. Supposing you're a contractor earning X per annum and you have a mortgage of 10X. Next year in a deflationary environment you have an income of X/2 because rates have dropped. That mortgage is now 20 times your income. And so if your rate goes to X/3 in the following year........ and so on - if you still have an income - then your debts become harder to service.

Confidence is all in some markets. If confidence drops, consumers wind their necks in and discretionary spending drops leading to declines in other markets. And so it goes.
To add to the mix some government bonds and central banks are offering *negative* rates for investors,

Interesting times ahead.

[Zero Liability]

Deflation is largely an issue to debt-whores, like many governments... and also given that they like goosing up the GDP by encouraging bubbles in markets like the housing market, and having everyone and their three-legged cat obtain a mortgage to "climb" onto the property merry-go-round.

And of course, if the price deflation is the result of a deflation of the money supply due to debt contraction, wrecking some banks, well then some banks won't be in such a good position anymore... also bear in mind that some highly leveraged players speculated on the oil price rising, which of course hasn't materialised, so they will suffer losses.

That's largely what economists mean when they say "deflation" is an issue. Falling prices are not, which is why the central bankers are less concerned about it. They are far more concerned about keeping certain asset prices, e.g. house prices or sovereign debt, afloat, and it is here where "deflation" becomes a threat, and leads them into twists and binds, e.g. Yellen's relatively nonchalant attitude about falling oil prices.

[scooterscot]

Deflation is largely an issue to debt-whores, like many governments....

WHS. Deflation is not a bad thing, unless you have debt/s. For everyone else it's a refreshing dose of normality. 2015 will be about the beginning of a return to normality. So either wages will increase dramatically or the government sponsored house price bubble will

[AtW]

People who were buying mega houses in London for crazy money were by large foreigners from countries that got rich on expensive oil.

[SpontaneousOrder]

Deflation is not a bad thing, unless you have debt/s.

It's not even debt that's the problem. Debt is part of any healthy & advanced economy, and deflation would still be a good thing in such an economy.

The problem is when that debt is what's propping up a Ponzi scheme - as per your housing bubble example.
Unfortunately, the entire UK (and much of the world) economy is one giant Ponzi scheme.