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Updated 9 March, 6.53am
THE EUROPEAN CENTRAL BANK will begin its €1.1 trillion quantitative easing programme today, the last big weapon in its armoury to get the eurozone going and fend off deflation.
But what on earth is quantitative easing and why did the bank’s president, Mario Draghi, and his cohorts make this call? Here’s everything you need to know…
What is quantitative easing and why are they doing it?
Quantitative easing – or QE for short - basically means the ECB will start creating money out of thin air. All those new euro would then be used to buy assets in the hope that getting more money flowing across the common currency bloc will inspire extra spending from governments, businesses and individuals.
The main drivers for the move are twofold. Firstly, the eurozone has been stuck in a cycle of high unemployment and low economic growth with little relief on the horizon.
Secondly, the region slipped into the deflation zone in December, meaning that average prices went down. Central banks generally consider an inflation figure of about 2% to be healthy and governments fear rampant deflation because it can send tax revenues and other sources of income into a painful downward spiral.
And they’re allowed to do this?
Yes, the ECB can. Because central banks control the national purse strings they retain the right to create more of their own currency at will. In the normal world, that normally means printing more money to replace coins and notes taken out of circulation. But in the QE world it means creating cash to buy things it couldn’t afford before.
However, the eurozone is a special case. Individual member states, like Ireland, don’t have the right to create extra cash as the ECB wields sole power over the euro. In fact, members are expressly banned from printing extra money to prop up their finances.
That is the reason why this country’s infamous promissory notes, used to stem the bloodletting after the collapse of Anglo Irish Bank, had to be unwound – because they amounted to the government creating money to prop up the failed bank.
Does the ECB literally start printing more money?
Not any more. While the visual of Draghi handing out of wads of €100 bills is appealing, the reality is the whole process would be done electronically. The ECB account keepers will simply add more money to its balance sheet – and then set about spending that money.
However one key difference between QE, in this form, and the kind of catastrophic money-printing policies associated with Germany in the 1920s is that central banks still have to buy assets on financial markets – rather than simply handing the cash straight to a government to fund spending.
The package being launched today includes plans for the ECB to buy about €60 billion public and private bonds every month between now and September 2016.
What’s with the name, can’t they just call it what it is?
That would be way too easy. The ”easing” part of the term actually refers to the relaxing of pressure on banks, while the ”quantitative” is a nod to the fact a set amount of money is being spirited into existence.
So who gets this money? Can I expect a cheque in the post?
You should be so lucky. None of the newly-invented cash will actually be headed to the pockets of EU citizens – although it has been suggested that would be a better way to stimulate the economy than the mooted plans.
Instead, QE in the eurozone will almost certainly involve the ECB buying government bonds – representing money that has been borrowed by those EU member states – from banks and other institutions. The idea is that all that extra demand pushes down the cost of borrowing, making it easier for countries to spend money on other things that get their economies going – like infrastructure or tax breaks.
Also the banks who have sold the ECB all those bonds would now have more cash to spend and, so the theory goes, this means they will start lending money to more people and businesses at lower rates – again driving economic growth.
What does it all mean for Ireland?
If all goes to plan with QE, it would have a number of positive effects for Ireland as a whole. Firstly, the flood of extra money would push the value of existing euro down – meaning the currency is worth less compared to the pound or the US dollar.
While currency traders have already factored in some of this on expectations of QE, it means Ireland’s exports to countries outside the currency block would get more competitive, hopefully increasing demand.
And if the plan successfully stimulates the eurozone that would also be a good thing, assuming member states, their companies and citizens all start spending more money on Irish exports too.
Higher demand for government bonds leads to lower interest rates on them, meaning the government would be able to borrow money more cheaply in the future – another win as the country tries to unwind its €180 billion-odd mountain of debt.
More importantly, what about you and me?
Not so much good news for the average punter, unfortunately. The main direct effect of QE for consumers is to drive the currency’s value down, potentially as low as equal footing with the dollar according to some analysts. That means, proportionally, the euro you have in the bank will be worth less than they were before – although the good news is any debts, such as your mortgage, are also worth less.
A low euro also means more expensive imports from outside the eurozone – everything from that new iPhone to the clothes you wear. And a holiday across the Atlantic or over to the UK will be less appealing as your euro no longer goes as far overseas.
Is this the first time anyone’s done this?
The US, UK and Japan have all tried their hands at QE, but the jury is still out on how effective the policy has been. The Asian nation the first to use the radical concept in the early 2000s, while the US and UK both turned on the cash taps after the financial crisis.
Particularly in the US, where QE has been worth about $3.5 trillion (€3 trillion) in total, the economy has rebounded sharply – although some have argued this would have happened anyway without the cash splash.
Europe’s programmes is said to be similar to that of the US Federal Reserve and Bank of England.
Why wait until now – wasn’t there a financial crisis a few years ago, or did we all dream that?
QE doesn’t come without risk, which is why it has been a controversial move wherever it has been rolled out. The primary fear is that all that extra money will suddenly cause inflation to balloon out of control, slicing the value of savings and assets across the region.
But the ECB has already tried every other trick in its bag to lift inflation and stimulate growth, with QE the only lever so far left untouched. It has already cut interest rates to record lows and gone on a bond-buying spree with existing reserves, neither of which has delivered a big enough bang to kickstart widespread recovery.
Germany, the most powerful eurozone economy, has also been leading the fight against the policy. Part of this stems from concerns that giving struggling countries access to easy money will reduce the incentive for them to come up with long-term fixes for their balance sheets.
Another worry is that the ECB – and by extension, other eurozone member states – will be left holding the can if it buys bonds from the most volatile economies, like Greece, and they default on their debts.
What’s the connection between QE and Katie Price?
Ah, we’re glad you asked. In a suprise 2012 move, the former glamour model suddenly started tweeting about macroeconomic policy, turning her thoughts to everything from Chinese GDP figures to this musing on QE:
She later denied her account had been hacked, with a publicity stunt emerging as the most likely explanation. So there you go.
Originally published 8am 21/01/2015
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One way or another, I’ve a gut feeling that the “little” people won’t come out if this well!!
The ECB is printing only 50 bn a month so it can be monitored and stopped as soon as Germany orders.
It’s all too little, too late.
Like taking aspirin for a brain haemorrage.
Thats a good analogy
Side note: aspirin thins the blood and would make a brain haemorrhage worse #justsayin
Please watch ‘money as debt’ on YouTube. Its animated. Them watch the American dream. Explains all this., and the farce it is that actually takes money out of your pocket by devaluing what you already have. Don’t forget to share.
You see people money is created out of nothing to give to the banks to loan to you or I at massive interest rates for something that does not exist
The money is going to banks … Guess who’s getting a bonus this year.., Yep the same wasters that were throwing money around like confetti in the 2000s.
I’m looking a new car. Can you sort me our fir a loan or will I ask my local butchers?
Not that the ECB should be printing money but if they have to hand out a trillion euro they could give it to the people of Europe and not continue to plug the hole for a bunch of bankers who continue to get paid!
It was already suggested by some economists that handing every EU citizen a couple hundred Euro rather than buying government bonds from banks would have a much larger overall economic benefit.
It was shot down because the ECB thought people might save it rather than spend it. They then proceed with a policy of handing money to banks and blindly hoping that they will then lend this money out rather than holding onto it.
Spot on Jason. Instead of pumping reserves into the parasitic financial system, a much more effective stimulus would see the money placed directly into the hands of the ordinary citizens to spend in the local economy to stimulate growth and jobs.
Here’s an Oxford economics professor calling for the ECB to provide every worker and pensioner in the Eurozone with a payment of €500 in order to help reflate the domestic economies.
http://www.project-syndicate.org/commentary/helicopter-drops-eurozone-deflation-by-john-muellbauer-2014-11
Well if they can click a few tabs on there system and create that type of money that is not real, go click a few more and wipe out everyone’s death with a few more clicks, and if you don’t have death, click another few tabs and give them people X amount of cash, problem solved,
mick, i hope they can wipe out my death and then I’ll be death-free!!!
The yanks tried that populist nonsense of sending everybody a cheque. Needless to say it didn’t work.
Neal,
When you say it didn’t work, what do you mean exactly?
Did the cheques bounce? Did the people not receive the money? Were the people not able to spend this “populist” money in the shops?
I mean it didn’t achieve the intended effect of stimulating the economy sufficiently to end the recession. I don’t deny that some people probably had a great day out in the mall, which I sure was a pleasant side-effect.
Neal the US fiscal stimulus package did work just not as well as hoped, the reason for that was that it was far smaller than had been advised was necessary. European economies are floundering due to an overwhelming lack of demand while America is only now starting to see proper recovery 7 years on
Another question to ask is why is it considered ethical in the minds of the ECB and others to basically hand money to the banks and not directly to citizens themselves. QE in the UK and US resulted in banks hoarding and speculating on the cash they got. This all the time average citizens saw their wages and spending power reduced to pay for the stupidity of the banks.
If the ECB and other countries wanted to really prevent deflation and boost the economy, giving cash directly to citizens would be a much better way to stimulate the economy as they are more likely to spend it than hoard and speculate on it like banks do, especially considering how much money us citizens have lost over the past 7/8 years. Give the money to us little citizens and not the people who got us in this mess to begin with.
Ciaran america is going through another bubble which is ready to pop
It’s basically a bailout for big countries….
Wealthy people in big countries to be precise.
True….
I’m definitely going to remortgage my house again to get back into stocks and shares ! Ha
It’s basically a bailout for anyone, any company or any country in debt.
Our currency has already fallen 10% against the dollar since it was announced. Therefore anyone who has cash in the bank has lost 10% and anyone who owes euros is 10% better off.
Not if you save in gold :)
That assumes that the rate of inflation goes up to 10%. Imports from the Euro zone will be affected less. Anyway we are along way off the exchange rates that existed when the euro was launched at US$1.07 to the Euro. Remember when the Euro was worth £0.67?. I don’t remember the sky falling in.
Quantitative easing is just printing more money: it’s like cutting a cake into more pieces, the cake is still the same size but the pieces are smaller.
Buy dollars before this happens then convert back to euro once done – nice tidy profit ;-)
I look forward to holidays in Europe for the next few years…. *sign*. 2 yrs ago the USD was around the $1.35 mark…
A lot of the FX drop of Euro to the dollar is simply to do with the fall in oil price, which you can see began some time before QE.
The graph Euro tp UK£ shows a much lower percentage reduction, and some of this is just as likely to be because the UK has shown some signs of GDP growth whereas the Eurozone stagnates.
There is likely a few percent shift due to market +perception+ of QE, but fundamentals will determine FX rates in the longer term. And, of course QE never happens unless those fundamentals are already in trouble…
Funny how this rather poorly written article talks about a ‘sharp’ increase in US growth. Really? Seven years after the Banking Pyramid scam crash, their growth is considered ‘sharp’? Dear author, please find some better sources.
It’s mosat likely QE will do nothing at all, as has been the case in US, UK and Japan.
This is because whether the real economy borrows to spend is laregly unaffected by relatively small shifts in interest rates at the level of banks’ reserves and financial sector assets.
Interest rates to the real economy are always much higher, and small shifts make no difference either way to households’ or businesses’ decisions to borrow.
Of course QE is a gift of liquidity to the Banks and Financial sector. In case anyone hadn’t noticed it in policy responses these last 7 years, the Banks’ (Capital owners etc) interests always come first…
It’s quite obvious that this money could just as easily been given to Governments to spend directly to quickly stimulate growth and employment, and as ‘created’ money, at no cost to anyone…. well, except perhaps in a lost opportunity cost for Capital owners buying up more forced sale & privatisations.
But the elites, Capital owners in Banks and the mainstream political classes couldn’t care less about mass unemployment or poverty. The laughable ‘democracy’ of a false choice vote every five years is easily bought off and manipulated via media owned by Capital owner classes.
A Capitalist system can work reasonably well for ordinary citizens, but not when the Capitalists have captured the institutions of of democracy which should represent majority citizens’ interests. In that case, democracy is lost entirely and the it reverts to the neo feudal system of the few Capital owners own everything, and workers increasingly become slaves.
This is exactly the direction of the neo liberal political agenda of the last decades since Thatcher/Reagan. It is a particularly nasty and sociopathic ideology (as we see). Not entirely surprising as there is a tendency for the 1% or so Psychopaths – no empathy, no conscience – to rise to high office, especially where greed divides society.
I believe they’re getting the tramps from Anglo Irish to give them tips on how to pull money and figures out of their arse.
What QE really is, is the government, or in this case an unelected elite in Europe, taking out a big lone that the tax payer is expected to pay back, to give to already incredibly rich people. They do this under now defunct trickle down economics which has proven to only make the richest 1% even richer and the rest of us poorer. It’s a massive con and we should fight it at every turn.
Rubbish.
No, Michael Budd is absolutely correct.
Does anyone now want out if this fat cat run sham of an EU? Please tell me majority of Irish are awake now.
We dont have an alternative. If we went back to the punt our crap government would do the exact same thing. They would devalue the punt to the euro..
I understand the sentiments against what is de facto a neo liberal jackboot EU and Euro system.
But it would be better to join with the growing social movements in Europe, Podemas, Syriza etc. to see if we can’t first reform it… or at least then organise an orderly break up (multiple exit) of the Euro, if such reform cannot be agreed.
It’s just printing money and handing it out to their mates. We are witnessing the biggest financial bubble the world has ever seen. There is trillions of dollars of dodgy derivative instruments hanging above our heads and this Q(ueer) E(conomics) will continue to pay out on their bad investments while we as taxpayers are there to cover any losses they may incur. The entire thing is a fraud. It’s legalised counterfeiting. How moronic and self consumed must society be to allow such a system build up around them. This is going to end very badly and people are walking around without a care in the world.
You really don’t understand this. Printing and giving it to their mates?! Lol
How does the central bank buying Irish government bonds equate to what you said?
Mick
In relation to the mates part of my comment, I was speaking in layman’s terms. Obviously not layman enough. I don’t literally mean giving the money to their mates. I mean that none of of this new money will enter the real economy to help the likes of you and me. It will just prop up the European banking sector for a while and allow governments to continue borrowing money to pay for essential services. The ECB is essentially buying up Europe’s debt to keep this charade going a bit longer and preventing a default.
Who benefits from these “essential services”? That’s social welfare and medical remember. Any why is this necessary? Because Irish people (amongst others) don’t want to readjust the government balance sheet to live within our means. Austerity means we only spend what we take in, not cutting for the Craic.
Mick
I really don’t understand what you’re trying to say.
Not to worry, don’t beat yourself up.
If you have 100euro in the bank today. Tomorrow your 100euro will be worth less after the ecb flood the market with euro s making them cheaper to buy . They are pinching money out of your bank account without you knowing.
You’re also more likely to attract foreign investment as Americans buy from Europe as we are now relatively cheaper therefore helping business and workers.
Please look up ‘ money as debt’ and money as debt 2 on youtube. Youll learn more about this stuff than 6 years of business school. IGive it a minute, you’ll love it
Fantastic video that money as debt series..
Rob the zeigeist is way better there is two movies to start with.Best i have seen they even have a solution to the monetary system._._.._
It will help the banksters and the rich but will make everyone else poorer by reducing the value of money in their pockets. Another Robin in Hood in reverse rip off, scheme.
How does devaluing money hurt money in people’s pockets but not rich people? Your sentence is nonsense.
QE drives up the prices of financial assets owned by the wealthy therby enriching them and making everyone else poorer..
“Some” financial assets and they are not held exclusively by “rich people”
Printing money and buying distressed assets such as big developers portfolios who are in Nama getting them off the hook “which they were never on” and people stuck in negative equity left stuck. Banks sell off distressed assets belonging to “the normal people” and create a profit and the whole thing takes off again. It will not stop austerity of “the normal people” though.
Something tells me that NAMA will be wrapping up their remains portfolios very quickly and ahead of schedule.
Actually the main point of QE is to devalue the currency and raise inflation which are bad for owners of capital and good for those in debt. How does that not help the “little people”?
I’m not an expert but printing money devalues currency but QE doesn’t
From what I can glean it seems like QE doesn’t do this because it goes to the 1% and they aren’t spending it on a basket of goods(consumer price index)
So my view of QE is that it gives money to the rich by improving balance sheets to which they have invested rising the price of stuck and the wealth effect.
Someone tell me if I’m wrong please
Raising the value of shares***
Yes you’re incorrect. Increasing the supply devalues the currency for everyone. The 1% that you speak of are more likely to have euros and therefore are devalued as a result. Don’t forget that every pensions scheme (for rich and poor) invest in shares too so improved balance sheets helps everyone, and lead to further employment too.
Yeah thanks mick that makes sense
QE is far too late, should have been done five years ago
That is for sure. It should have been the first thing that was done. None of this unrealistic bailout crap, that’s impossible to repay. I suspect it won’t ever be repaid and probably currently isn’t. But us normal joes won’t be told that as they will use it to squeeze more money out of our pockets. In effect acting like the poor struggling farmer. We are conned daily. It’s best to question everything that is government related, and ensure they know we know they are not to be trusted. Vote them out or protest against them on the 31st.
QE is a total waste of time. Except for banks. It affords them a little more money for gambling on their own account in the casino, hence the stock market boost that followed US, UK and Japanese QE.
But the Central Bankers are still bankers & represent the interests of bankers & other Capital owners, not citizens.
As noted in the article, QE did nothing for UK or Japan. It did nothing for the US either. The only reason US economy has recovered faster is because they applied an $800 billion Gov spending stimulus and then when they later decided Austerity was the thing, they didn’t actually do any Austerity. The stimulus wasn’t enough to bring a quick recovery, but it helped keep US unemployment way below Austerity Europe’s.
The thing is, people should note some of the fuzzy language in the above article which shows just what a pile of droppings neo liberal ideology masquerading as mainstream economic thinking really is….
The article uses the word ‘hope’…. the ‘hope’ is that banks will lend on more of the liquid money they get in swapping bonds for central bank created money.
But banks, in the actual accounting book-keeping operation, don’t need to source money from anywhere in order to lend – they simply type numbers into your current account (credit) & balancing numbers into your loan account (debit). That’s it, job done. Just as the UK’s Central Bank admitted in plain language last year…. “… loans create deposits… ” (not the other way round). And the other corollary, for all the mainstream ‘household finance’ dumbos still in the neo liberal/neo classical groupthink… eg ALL Ireland’s prominent economists, intellectual frauds all, but well paid to be so…. Investment creates Savings, not the other way round.
Banks don’t need ‘Reserves’ in more liquid or other Financial Asset form in order to make loans. What they need is a real economy that shows potential aggregate demand demonstrated by staedy growth in spending – especially by ordinary consumers. It helps when consumers are not already over burdened with private debt and mass unemployment, falling wages & Gov spending cuts.
Once again, for all the hard of thinking, the Monetary and MACRO economy is NOT like ‘household’ or simple ‘business’ with bigger numbers…. Gov debt is NOT like household debt…. the Gov sector, which includes CENTRAL BANKS and MONEY ISSUANCE is not like a ‘household’….
It should also be noted that Corporations are sitting on wads of cash from retained profits (offshore, naturally)… which they aren’t investing. That is because DEMAND comes first – the causal factor – consumer spending, for which consumers need WAGES.
So, as we see, the private Non-Gov sector only acts Pro- Cyclically…. gorges in the boom phase, starves itself in the bust phase… households & businesses both.
This is why the Gov sector, with its unique non-household financial ability – including money creation and issuance thru’ its Central Banks – has a unique role to play in the MACRO economy. The Counter – Cyclical role – spending to stave off/limit recessions, taxing money back out of existence during overheating, inflationary booms.
In other words, the Government sector has a unique role in STABILISING the macro economy, AND ensuring overall demand spending is sufficient to utilise all our resources, especially our LABOUR resources…. because the latter are PEOPLE, who need a wage in order to live.
But…. this doesn’t happen does it? Want to know why?
It’s because the Capital owners, the wealthy top few percent, who make income largely from the ownership of money or other assets, rather than their labour, make more money from both bigger Boom AND Bust phases of economic instability. And Capital owners have an insatiable, blind greed for more money – short term profits, regardless of consequences for society or even long term consequences for themselves. (Clinical Psychopaths, no empathy, no conscience, are significantly over represented among Banking/Finance top executives, and other uber rich.. )
Guess who owns politics, media and the democratic (haha, as if..) system? The Capital owners.
Guess who has paid billions for the highly educated intellectual fraud of mainstream economics, esp over the last 50/60 years, since the days of McCarthyite ‘communist’ purges of academe? The Capital owners.
Just as former mega-hedge fund manager (PIMCO, world’s biggest) Paul McCulley said in his Kilkenomics 2012 lecture (on youtube, do watch it)…. it’s Capitalists versus Democracy… and the Capitalists have won… Which McCulley believes will ultimately lead to collapse, and was warning us that restoring a ‘balance’ is urgently needed.
Also why world famous billionaire investor Warren Buffet said…. “…. it IS class warfare… and my class has won… “, which again, Buffet said as a warning… Capitalism out of balance, totally dominating, as it has now, sowes the seeds of societal self-destruction.
It is entirely obvious to anyone with intellectual honesty & even a basic understanding on Monetary & Macro economics, what the EU and especially the Eurozone needs to bring quick recovery to ordinary citrizens… jobs, wages and decent public services and public investment in our children’s future.
We need increased spending – fiscal ‘easing’ – into the real economy. Smart spending with a mix that gives both immediate relief, like a Job Guarantee (to MMT specification, not just any old sh..), plus public investment spending on housing and other infrastructure. Above, such a spending STIMULUS – applied in the quantity required to fully utilise our available resources, and no more – will circulate around the economy and stimulate private sector growth as well.
ALL of the European currencies, including the Euro, are FIAT, FREE FLOATING currecies created from thin air. THERE CAN BE NO SHORTAGE OF FINANCE in such a currency, ever.
Just as the ECB can conjure money from thin air for useless, but bank friendly, QE, it can provide it (in fair, equal per capita amounts) to Euro zone governments to spend on agreed, common stimulus programs.
The ONLY things stopping this are political/idelogical and the vested interests of the already rich & insatiably greedy who already have more than enough wealth.
IT IS THAT SIMPLE!
Wake up, and educate yourselves on the monetary and macro economic system REALITY.
Mike Hall, great and interesting article but as someone said to me once “the reality is that it all comes down to expectations”.
Things use to be simpler when a currency was pegged to the amount of Gold you had. I wonder why Russia is a big buyer of gold lately. Economic war is in the horizon.
What the article doesn’t explain is that all spending by a sovereign currency issuing states e.g. the U.S. and U.K. causes money to be created from thin air. Government spending creates new money and puts it into circulation while taxation removes money from circulation and extinguishes it. Taxation is what ‘backs’ the currency. The government imposed tax liability creates a demand for the currency, ensures it is widely accepted and gives the currency legitimacy.
So when the U.K. government pays its public sector employees, it is actually creating new sterling which did not exist before the salary was paid. So for example a £2000 monthly salary for a nurse in Britain will see her Barclay’s account credited by £2k (broad money) and Barclay’s reserve account (base money) at the Bank of England increased by £2k, all done by simply pressing the necessary computer keys to adjust the double entry accounts. Some of the new money is removed immediately via income tax and other amounts later through VAT on purchases etc. But the key point is that the U.K. does not need to obtain sterling from anywhere to pay the wages as it is the source of all sterling.
As a sovereign currency issuing state can simply press computer keys to create new money, they do not need to tax in order to spend in their own currency. The act of government spending actually creates the money which is then later removed from the economy via taxation. Neither do those nations need to borrow their own currency from anywhere is order to finance public services such as health and education systems, social housing or an efficient, well maintained water supply network. Such a state could for example implement a large scale social housing construction program to address the homeless crisis which Ireland currently faces. This would involve the government simply crediting the bank accounts of the builders, material providers, etc as necessary to have the homes built with the added benefit of creating desperately needed jobs in the construction sector. This contrary to neo liberal myth is how sovereign governments actually spend in their own currency. They face no financial constraints whatsoever in that currency.
The state may face real resource limitations e.g. energy but not a financial constraint as it can never be insolvent in its own currency as it issues that currency).
The macro economy of nations and the globe is fundamentally different to the micro economics of business and households (private sector) who are users of the currency but not the issuer. A sovereign currency issuing government can afford to buy whatever resources are available for purchase in its own currency, (including the labour of the unemployed) as they can never run out of keystrokes and so a budget deficit should not be considered a problem once this understood.
This is why most countries can run a budget deficit most of the time and it makes perfect macro-economic sense to do so. It’s really only the Eurozone countries that are required to borrow their own currency in the market at an interest rate determined by the market. Fiat currency issuing nations like the U.S and U.K do not need to obtain dollars and sterling from the bond markets to finance a budget deficit or indeed to cover odious private banking debt in the domestic currency. (That is why the enormous £850 billion bank bailout in the U.K. did not bankrupt the nation as it did in Ireland’s case). When those states do choose to issue government bonds the primary objective is to implement monetary policy (usually to drive their chosen base interest rate to target) not as a necessity to raise revenue. In addition, when those countries do ‘borrow’ in the market, they effectively decide what the yield/interest will be unlike the Eurozone nations subject to the tender mercy of the speculators.
Traditional Quantitative Easing has already been tried in the Eurozone to the tune of €1.4 trillion in and has failed to stimulate the domestic economies and stave off deflation.QE increases the amount of central bank reserves available to the commercial banks on the mistaken premise that bank lending to business and individuals is reserve constrained. It isn’t. The banks lend money to anyone they believe will pay them back and then seek the necessary reserves after the fact and which the central bank is effectively obliged to provide. Traditional QE is largely ineffective for this reason. Commercial banks always act pro cyclically and so reduce lending in a recession as the risk of default increases.
A much more effective stimulus would see money placed directly into the hands of the ordinary citizens which will be spent in the local economy to stimulate growth and jobs.
For example, here’s an Oxford economics professor calling for the ECB to provide every worker and pensioner in the Eurozone with a payment of €500 in order to reflate the domestic economies.
http://www.project-syndicate.org/commentary/helicopter-drops-eurozone-deflation-by-john-muellbauer-2014-11
An even better and more sustainable way to create full employment on a permanent basis would be to implement a Job Guarantee. The sovereign state with a floating currency such as the U.S. Japan, U.K, Australia etc faces no financial constraints in its own currency. The state may face real resource limitations (e.g. energy) but not a financial constraint as it can never be insolvent in its own currency as it issues that currency. Neither is inflation a concern in the current recession where vast resources (including labour) are lying idle. The only ingredient missing are the keyboard strokes to create the fiat currency to put those resources to productive work and increase the real wealth of goods and services to be shared by us all.
This ability to keyboard money into existence at will should be utilized to implement macro economic policy which benefits the vast majority of the citizens (labour) as opposed to current policy which enriches the minority (capital owners) . The primary plank of this policy should be the Job Guarantee (JG) where the state/government acts as the employer of last resort who finance the scheme using their ability to create the domestic currency at will to pay the wages of the JG participants. In a Eurozone context, it would be the ECB who would finance member state spending to implement their national JG schemes.
The JG is a strictly voluntary, transitional employment, available to any and all unemployed, or underemployed, who wish to avail of it. It does not replace existing social welfare provisions but operates alongside them. The JG employment is intended to be transitional, its numbers fluctuating in an automatic counter cyclical fashion so rising during recession and falling as the economy improves. The jobs are transitional to ‘normal’ employment in the private or public sector, and must not compete with ordinary employment. So, the JG jobs need to be exclusively in the Community, Voluntary and Charity sectors and at full time (40) hours or any fraction thereof which the worker chooses. The JG wage must be fixed at the minimum wage which is determined by the lowest acceptable standard of living. This creates an effective wage floor for labour. Capital owners must pay more than JG rates and/or offer better benefits etc to convince people to work for them.
The Government would supplement the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care etc. The JG would be integrated into a coherent training framework to allow workers (by their own choice) to choose a variety of training paths while still working in the JG. However, if they chose not to undertake further training no pressure would be placed upon them.
The JG also fulfills a critical macro economic function, the maintenance of aggregate demand and spending in the economy. It’s always aggregate demand spending that ultimately creates and maintains jobs. Someone’s spending is always someone else’s job and income as the macro economy is circular. It is the aggregate spending of everyone in the economy, public, private, individuals and businesses that maintains and creates employment. When aggregate demand is either too little (unemployment high), or too much (inflation rising), it is only the government (central bank) that can act counter cyclically to make the appropriate adjustment. The government can remove money from the economy via taxation in order to combat inflation or pump stimulus spending into the system to counteract unemployment. Another key element is that full employment maximizes the production of real wealth (goods & services) to be shared by us all and so drives up living standards for everyone. The jobs benefit the individual and society as a whole.
The Job Guarantee proposal and the correct understanding of how fiat monetary systems and the macro economy operate has been developed by the Modern Monetary (MMT) School of economics.
The MMT basics are available here if people are interested.
http://modernmoney.wordpress.com/index/
If you had a minute at the microphone to explain this to the Ordinary Joe and were looking for a vote, how would you summarise it?
Thieves are running the gaff ….
A very informative and interesting read. Thank you for that information!
Why John? Are you planning to use this economic insight in your election campaign?
Coddler I’ve lost count of the times you have copied and pasted that comment on this website. Communist waffle is all it is
So Pepper how has capitalism being treating you and those you love?
Coddler if you tried to summarise it into just a few sentences you might find a valuable point of view lurking somewhere in the density.
As it is, it’s like a fuzzy TV screen with no signal.
If sovereign nations “can never be insolvent in their own currency as they issue that currency” as you say, why did the UK have the IMF in in the 70s, and why is Argentina insolvent despite issuing their own currency. You are either ignoring or minimising the impact of inflation, which throws everything else you’ve said off. Simply put, nice in theory, not true in real life.
Argentina was not insolvent in its own currency, the peso. Under advice from the ever benevolent IMF in the early 90s, Argentina had made a huge mistake in pegging it’s currency to the dollar. As a result, the Argentinian central bank could only issue pesos if they were backed by US dollars in order to maintain the peg at a fixed exchange rate and so were effectively a user of an external currency. So dollars had to be earned through net exports much like the Eurozone countries now who also are effectively users of a foreign currency. In early 2002, Argentina was forced to scrap the peg and so defaulted on its commitment to convert pesos to dollars at a fixed exchange rate. This is not the same as being insolvent in the peso.
The U.K. borrowed foreign currency from the IMF in 1976, again to try and maintain the exchange rate with the dollar. You can read more on it here:
http://www.3spoken.co.uk/2013/03/uk-borrowed-foreign-currency-from-imf.html
The U.K. was never insolvent in the pound as the bank of England can never run out of keystrokes to create sterling.
It is invariably a mistake to peg a currency to any other currency (or commodity like gold) unless you have unassailable reserves of the foreign currency like China’s dollar reserves for example. This lesson has largely been learned (outside the Eurozone at least) and most modern currencies are now floating with no promise of convertibility at a fixed rate.
Inflation is not a concern in the current recession with massive resources including labour lying idle. All that is required is the necessary keystrokes to put those wasted resources to productive work.
The Federal Reserve has lent and spent $29 trillion to rescue the U.S. financial system since its systemic collapse in 2008. That’s $29,000 billion created from thin air.
http://www.levyinstitute.org/pubs/wp_698.pdf
Yet this staggering sum, which amounts to over twice U.S. GDP did not cause a sovereign default or force the U.S. to seek IMF loans and has not caused any inflation above normal levels.
It’s almost as if the general population is being entirely misled in the mainstream establishment explanation of how the monetary system and macro economy actually work. Now who might benefit from such a strategy………..
Egg Head
The reason why the US & UK (officially) pretend a need to borrow to spend in their own currency is the politics of vested interests combined with an intellectualy fraudulent adherence to Monetary operation requirements prior to 1971 when currencies had fixed exchange rates & dollar convertibility to gold (the Bretton Woods system). Since 1971, no such constraining features have existed for US or European currencies.
Thus the reason UK went to the IMF is pure neo libera ideology/politics which prefers the lie that such governments are financially constrained. In general, this is an ideology of the Capital owning classes and bankers etc. for whom the pretence of money scarcity gives them enormous political power.
Coddler has not ‘ignored or minimised’ the risk of inflation, but stated plainly the mechanism of the inflation constraint. So for hard of thinking types like yourself, I’ll repeat it for you…
If there are sufficient REAL RESOURCES (material & labour) available to be purchased in the currency of issue (ie not goods for which a foreign currency is needed) then no inflation will ocurr. Business always chooses to supply more goods & services, if they are able to, and make more profit at existing prices, rather than try to increase prices and cede market share to competitors (with likely LOSS of profit thru’ reduced sales quantity).
Thus, it is the availablity of real resources, not money supply, that determines the inflexion point of inflation, and limits to purchase, not money supply – either ‘created’, or with ‘debt’ attached, the ‘transaction’ price at point of sale doesn’t know the difference.
Note the inflexion, or tipping point, up to which inflation will not ocurr.
Inflation, as all the macro economic data shows (that ignorant ‘household’ economics dumbos never look at..) is NOT in linear relationship with the money supply.
So to get things back on track again the ECB is printing money? and in Ireland to get things back on track we are burning it ??? ….. mmmm confused?
Absolute madness…if anything they should lower some tax rates which would then allow more discretionary spending within the markets…printing more money just makes it worth less
Yes, but devaluation affects everyone, the austerity which you propose ie cut taxes = cut spending, will be too difficult for poorer people.
mick ya lost me at poorer people
its another Ponzi scheme and who always gets burnt
Jesus Christ
Is this not fuelling a borrowing/debt cycle. Was this not the sort of policy that led to the country going belly up. Is lunacy not doing the same thing over and over again expecting a different result. Leaving more money in people’s pockets would be more productive for the hammered domestic economy than these grandiose schemes! !!!!
Yes but there is a happy medium and we swung too low naturally after the boom that it’s impacting on good businesses that want to grow.
Yes but there is a happy medium and we swung too low naturally after the boom that it’s impacting on good businesses that want to grow.
So it will cost much more for me to send money to my daughter who is studying in the UK
ECB president Mario Draghi… But he is a puppet, he does what he is told.
Q.E. does two things, firstly those who get the money first get richer and secondly Q.E. creates INFLATION. That means prices and bills go up and not wages…
No, it doesn’t ‘create inflation’ dumbo, go and look at the last 7yrs of inflation vs QE data for UK, US, Japan etc…. no excess inflation, no correlation at all, never mind ‘causation’.
Inflation is NOT simply a function of money supply, stop peddling nonsense and educate yourself.
By the way, Japan, with Government ‘debt’ (which isn’t like dumbo’s household debt) the highest in the world at over 230% of GDP, has about 40% of GDP’s worth ‘held’ by their central bank, the Bank of Japan. Know what that means?
It means that BoJ have simply created that 40% of GDP money from thin air & the Japanese Government have spent it into their economy, free, gratis… and guess what? NO INFLATION in Japan…
http://news.bbc.co.uk/2/hi/business/7925981.stm
“Nonetheless, measures under consideration such as “quantitative easing” do amount to the deliberate creation of much more circulating money. And that can certainly have implications for currencies and inflation rates. ”
“For it is Germany and Austria that have the most profound European anxieties about printing money, having lived through ruinous hyperinflation in the 1920s. ”
http://rt.com/business/central-banks-easy-money-941/
“The goal is to make borrowing cheaper, which in turn should stimulate spending and investment by households and businesses. But creating money out of thin air and then it them into an economy is a high – stakes experiment not explained in standard textbooks and implying huge inflationary risks. ”
So you are right and Robert James Kenneth Peston, RT and Chris Bowlby wrong?
http://rt.com/business/quantitative-easing-us-bonds-898/
“On the other hand, an abundant supply of cheap money in the wake of weak economic growth creates risks of new financial bubbles, mainly in real estate and financial markets,” Orlova added. ”
http://rt.com/shows/keiser-report/episode-472-max-keiser-217/
“Max Keiser and Stacy Herbert ask whether or not it will ever be possible to unwind quantitative easing as the parallel universe it has created sucks out interest payments and central bankers’ brain cells. They discuss the latest in a long line of market rigging – this time the traders who allegedly rigged QE. In the second half, Max talks to Pete Comley, author of Inflation Tax, about inflation, how government regulated prices are rising the fastest, and the pound sterling’s century-long decline. Comley also asks where are the protests in the UK against the 11 percent theft of savings by quantitative easing?”
http://moneymatters-monetarypolicy.eu/will-qe-surprise-on-the-upside-or-the-downside/
“Concluding whether a positive surprise is more or less likely than a negative one is everybody`s guess, also because there are extensive trade-offs between the different characteristics and a better outcome on one aspect may be offset by a worse outcome on another one and vice versa In addition, the overall design might not be immediately clear on all technical aspects. Still, looking at the different leaks about the difficulty of the decision in the Governing Council, one cannot exclude market disappointment when eventually QE will be announced.”
By Andrea Delitala of Pictet Asset Management and Francesco Papadia, with the assistance of Madalina Norocea.
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1557.pdf
“”This crisis started in the developed world It will not be overcome… through… quantitative
easing policies that have triggered… a monetary tsunami, have led to a currency war and
have introduced new and perverse forms of protectionism in the world.”
President Rousseff of Brazil (2012)
Yes, that’s right Michael, Robert Peston is an ignorant journalist with little idea of his own. He is merely an echo chamber to the mainstream nonsense. QE only ‘creates’ more circulating IF the banks decide to lend as their mainstream (incorrect) script goes…. but QE money does squat to encourage banks to lend or borrowers to borrow if economic conditions don’t require or warrant it – like now.
Also, more circulating money has not shown up in the data for countries that have already conducted massive QE. EVIDENCE Michael, not more mainstream ‘Groupthink’ nonsense.
However, given the US$ status as a parallel working currency in many countries, especially in the developing world, US banks given QE largesse have used it for speculative financial asset purchases in developing countries like Brazil, causing local problems in their markets, hence Rouseff’s comment. But her monetary tsunami applies only to Financial/Asset markets there, relative to their normal market size. Many countries with such US$ activity had to apply Capital controls. Again, this money does not get into the real economy – asset speculation is not the real economy.
So it will be the same experts who will bring in Q.E. as those who brought in AUSTERITY, I wonder how that worked out? lol. So why did they not bring in Q.E. instead of AUSTERITY or had they not a clue what to do but had to be seen doing something and didn’t know what?
Now you’re getting Michael.
Yes, we have exactly the same mainstream ‘expert’ Groupthink that created a monumental Financial crisis from what they heralded mere weeks before Lehmans went bust as ‘the period of Great Moderation’… (seriously, read what OECD were saying only 6 weeks prior… growth and stability continuing etc.. more self congratulation etc).
But note, the ECB and BIS knew exactly what was happening with banks’ balance sheets & flows of Capital across Europe, and that it was pumping monumental property bubbles – commercial property investment thru’ Irish banks, more than household mortgages, both commercial and household in Spanish banks.
These same experts that had triumphed with their ‘Great Moderation’, who had ignored ‘heterodox’ economists like Hyman MInsky and Wynne Godley, then, in Europe especially compounded the economic shock by raising the expansionary contraction fairy, otherwise known as Austerity. Curing a sudden, large economic contraction caused by falling aggregate demand with…. Fiscal cutting more aggregate demand.
All based on very similar ‘morality play’ hairsheet doctrine to that which created the the Great Depression out of the 1929 Financial crash…. which itself was an eerily similar morality play to that whereby authorities refused to give (free) food to the starving of the Irish Famine, because it would corrupt them morally from working for their food in future.
Indeeed as Wynne Godley warned in 1992 (published in London Review of Books, now online), setting up a Euro currency zone with no means of providing a Central Bank (currency issuing authority) backed Fiscal Stimulus, counter cyclical ability, would produce precisely the deep and long recession, mass unemployment we see now in the Eurozone.
But of course, Austerity is only for the little people, the masses. These boom/bust ‘pyramid’ policies are highly profitable for the Capital owning classes that both include and are represented by the politicians and senior public servants, media owners and editors, lawyers etc.
So you are saying that the top 1% like bursts because they are rich enough to buy up everything cheap and sell them later in a boom and the system is made that way so the rich gets more rich and more powerful? So everyone knows what they are doing? I think they try to do this but sometimes nothing can be predicted either?
The imf came out this week and said the usa has the best growth forecast in the world after Fannie Mae,Freddie Mac and a host of other large banks fell to their knees and brought the world economies with them. The usa owes trillions of dollars “mainly to China”!!! The usa the land of opportunity, where you would die in the street of the hunger or cold with little or no social welfare if you fell on hard times. The land of the vastly wealthy and the vastly poor, “no minimum wage in usa” the land of dreams and Hollywood the land of the rich and not the poor. The biggest example of quantitive easing in the whole world. And they are an example to us to look up to! The usa does not pay off their debts but just keeps printing money “qe”
You get painted the Hollywood picture and end up with a scene from Oliver’s twist!
Wait till China wants payback!
China has been pulling its cash out of the USA and buying real assets in many countries around the world for a number of years now-in anticipation of the trashing of the dollar and the Euro.!
There is one one beneficiary in all of this. The banks that sell the bonds to the ECB and then buy the bonds of sovereign nationals.
Crazy that a country has to borrow its own currency.
The Elephant in the Room.
It’s like saying “Ireland here is more debt to add to you re mountain of debt, it’s good for you it’s cheap than the last stuff we gave you”.
I’d love one of those machines for myself.
BOOBIES!!!!
QE, however large, has never cured or reduced the impact of prolonged austerity or prevented a slide into deflation.
Quite so, because the ‘money’ is only an asset swap/liquidity move at the level of Banks’ Reserves (their Central Bank accounts), and thus doesn’t get anywhere near the real economy.
Simply buy assets that will go up in price due to QE.
Everyone can participate. Just like we could have all bought Irish bonds when they were on the floor.
We could all “participate” John if Enda had left us something to participate with…….
Fallacy of composition, johngahan.
Everyone cannot participate, as the price of such assets would then explode massively beyond any real value – remember the property market? Beyond the aggregate real value of the market (typically aggregate real resources), it becomes pyramid scheme gambling. Which, so long as they can rig the game (ie achieve de-regulation or Irish/EU/ECB ‘blind’ regulation.. same thing), is what much of modern finance is, even tho’ it always crashes, as it did in 2008.
Also, if ‘everyone’ had sufficient idle Capital (cash) to invest in such assets, besides the mathematical/logical impossibility of that, we would not remotely likely be in the situation of stagnant/falling aggregate demand spending that is the root cause of the stagnant economies, so any question of QE, dumb as it is, would not arise.
It’s MACRO economics, ‘household’ thinking…. dumbo
This would have been a good idea if it had been done a few years ago when the UK and US were doing it. Of course it didn’t suit the Germans then who have a post-war hang-up about inflation and everything was done to suit the German economy and to pot with what was good for the EU as a whole.
QE makes the rich richer and very little trickles down to the ordinary citizen. Buying assets only favours those who have assets, the rich. It doesn’t result in governments spending more and enduring a more equal distribution of wealth. Just look at the widening divide in the USA between rich and poor after trillions was pumped into the economy.
They pull everything else out of the air so why not money too
Well, claire, if not from ‘thin air’ where +does+ money come from?
You might want to discover how this comes about, who controls it, and in whose interests…
Might be important…
They’re all meeting in Switzerland today to have a good laugh at ordinary Joe, when will we wake up and smell the BS they keep feeding us? Baaaaaaaaaa
Top 5% benefit, the rest of the country will no longer be able to book a flight outside of the EU
What a load of crap. Who in heavens name writes this nonsense. Dig a little deeper try a little harder for your storey.
WHY, AS IT IS THE TRUTH.
Why not give every working adult in the euro zone a major tax break for 2 years and the money lost by the taxman is paid by the ECB over that period.
That would be an effective way of stimulating each economy.
The Euro will be devalued in the hope of increased inflation through Europe.
The German National debt was halved after World War 2 – it was called “Marshall Aid”
Eaten bread us soon forgotten!
Ireland Inc has been “screwed” !
Honest Irish Taxpayers are now paying the liabilities created by Irish Politicians (Bertie and Brian Cowen), Developers, Builders and Irish Bankers.
UNSECURED Bondholders were transferred into a Sovereign debt by Act of Dáil Éireann!
Every nan women and child in Ireland now owe approx €100,000 each
A sobering thought!
our elected Politicians were paid €100,000,000 in the last three years!
They now have huge unfunded pensions!
Inflation coming!!!
Eventually, this too will have to be paid back…Europe is fubar in the long run. Ya gotta think what’s going to happen in the next decade, with aging populations and low birth rates….this just all seems so unsustainable
In the first picture Draghi looks like hes passing that trillion through his colon .
How is this not a crime??
Because that is how banks work? They create debt by giving out loans they don’t have in order to excuse printing more money?
Question… Why is the journal updating and bumping an article that’s a month and a half old?
Drama value.
Does no one here understandthe difference between printing money and loans? QE will help the government reduce defecits . And as for the crap about usa not needi g to borrow dollars what do you think china gives them
But Goldman Sachs did own the bank of China a while ago now and China has bought over most of the U.S. NOW?
Fffuuuuuuuuuuuuuuuuuuuuuuuck!!!!
Create money to buy debt that never really existed. Welcome to Neverland!
Not really, it’s creating new money, which can then be used to possibly buy bonds, or invest in a policy like leader or CAP etc.
Well if they can pull it out of thin air .. Debt forgiveness for all . Reset the button .. Can’t be just for banks & bondholders the normal people need a break too .. Good for goose food for gander
So the ECB pulls this money out of their a$$ (printers) our banks get it and the give it to us…………..at interest.
I’d rather the €2,186 it would be for every single person in the EU
Good oul’ Mario. I have often called him the lizard king, but he is actually a lizard consiglieri – that shite-bag would never qualify as a king. My opinion of the latest ‘beezer wheezes’ by the ECB and others may be taken as read. BTW may I ask if any other poster is as bemused as I by the fact that the USA have attracted so little flak over this entire seven year debacle – given that the policies, the sub-prime lending, the ‘bundling’ of mortage products etc., HAVE ALL come from the dear old US of A? Need we even mention Lehmann’s bank? How does all this transpire?
So you have a policy that won’t have any positive impact on “the average punter”, but comes with “a certain amount of risk”. I see. And this “risk” will fall on…whom?
I’m a banker (well, I’m not, really) and the government is giving me money at a very cheap rate. I can simply buy government bonds at a higher rate of return and collect the difference between the two as pure profit. Whoohooo.
I don’t have to loan the average paddy squat to make a killing. No risk for me, plenty of risk for the paddy.
This is exactly what happened in the US.
Interesting the USD/EU graph shown ends on Jan 20th. Seven weeks later, the USD/EUR is 1.07.
In the last year, the Euro has lost nearly a third of its value. And this is the starting point for QE. Over here in the US they’re talking about cheap European vacations. Paris, Berlin, Vienna, Florence, but not so much Dublin, though.
Q.E. does one thing it allows the rich to make money at the top of the money pyramid on the markets and by the time it gets down to the man on the street inflation will counter act any benefits. So nothing new for Joe Soap…
..and then they’ll tax the living crap out of Joe Soap!
When have they not?
Great Band Big Country
I dont understand the logic the secular world is making something that is completely made up ie money more believable than god.
The lie is crumbling though because whether you like it or not the money system cannot fix a world that is ignoring the growing problem of greed.
“ECB to buy about €60 billion public and private bonds every month between now and September 2016.”
WHO THAT WAS IN DAVOS THIS YEAR WILL BENEFIT FROM THIS?
have your say