So today we got an idea of what the ECB will propose tomorrow regarding monetary policy to combat the “crisis in Europe.” And it appears their hands are as very well tied as are the Fed’s. It’s important to understand what the ECB is proposing and how it impacts risk assets.
Policy can be divided into two categories, inflationary or non-inflationary. Inflationary is the most powerful. It injects capital, fueling risk and pushing prices higher. But when inflation is already a risk, then the non-inflationary approach is used. It is really that simple. And it is clear that the days of inflationary strategies are limited.