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July 9, 2012

Central Banks in Europe Easing Further



Late last week, Central Banks in Europe began coordinated activity to ease monetary policy and pump more liquidity into a continent that is slowly dragging the global economy down. The Bank of England kicked things off by holding rates steady, but adding 50 billion pounds to its quantitative easing program. The UK's economic situation has been kept out of the mainstream media, but in my opinion, they are hurting worse than France and Italy because of their exposure to sovereign debt. In Denmark, for the first time in this business cycle and the second known instance in modern history, the central bank cut its deposit rate to negative 0.2%. Lending rates remained positive, with the CD rate cut to .05%. Deposit rates were cut to negative because the Danish krone has become an increasingly used reserve currency. While many people may think having a strong currency in a time like this is beneficial, it hurts any trading Denmark participates in. It is much harder to export goods and services if the currency (or currencies) around you are rapidly depreciating. Finally, the ECB gave us the grand finale and lowered its benchmark rate a quarter of a point to 0.75%. The Central Bank also lowered its deposit rate to zero. Our belief is that the benchmark lowering will have no effect in the Euro Zone, whose unemployment rate is now over 11%, but the zero deposit rate may have an impact pushing some deposits out into the economy. The Obama Administration should look to Europe, not as a 'blame game' tactic for our weakening economy, but as an example of what happens when the Administration's economic policies are extended over a period of time. Europe has stronger labor laws than the United States (as well as strong unions), yet their unemployment rate is higher and the number of unemployed youth outnumber the employed youth. On top of the stark labor issues, the continent has a pension program that guarantees more money to public sector employees when they retire. Yet, governments are having a difficult time finding the money to fund them (hello Illinois and California). Finally, despite all of these issues in Europe, the inflation rate is at 2.4 percent, which is currently a 16 month low. It is very interesting to continue to have positive inflation in the face of such a deflationary threat (not to mention negative growth). Once again, we need to learn from Europe. Otherwise, we are bound the see a repeat of their nightmare here at home and in the near future.

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