ECB QE

strandsman · 21-01-2015 6:00pm #1

So it seems the ECB are going to print money (QE). Where does that money go when it leaves the print press? Am I right in assuming it will be used to buy government bonds? If so why? Why doesn't it just use the money to reduce each countries borrowing's which will allow countries governments reduce taxes and stimulate growth. It seems to me that "bond traders" will benefit with increased incomes from trading on these bonds while the tax payer will carry on paying off huge debt.

andrew · 22-01-2015 6:50pm

To put it shortly (and to be clear, no actual paper money is being printed here), the ECB will approach banks and Pension funds, and purchase Government bonds from them. The banks and pension funds will then have to take this money and make other types of investment, like loans to companies, and in this way make it easier for firms to get a loan. This, combined with the effect of a reduced exchange rate, should help the Eurozone economy.

Bond traders don't directly benefit in the sense that the ECB won't be buying bonds from, say, small firms which have bought bonds speculatively. But to the extent that this move causes price swings in bonds, then they'll benefit, but it won't be with ECB money as such.

The reason that the ECB doesn't just give countries money (this is called monetary financing) is because, (aside from the fact that sometimes this is a bad idea), the ECB is not allowed to.

1st dalkey dalkey · 22-01-2015 11:25pm

No, the ECB is not printing 60 billion of Euro notes per month, but it is increasing the amount of Euro in the system by that amount.

As far as I understand it, this is supposed to drive down interest rates, encourage borrowing and investment. This might be possible in an environment where companies wanted to borrow i.e. saw some opportunity for growth and profit. That in turn might be possible if people were spending.

But people are reluctant to spend, not because of dreaded deflation, but because of minimum wages, zero hour contracts etc. making every penny precious in a situation where the future is uncertain. Take on more debt? No thanks, we have seen what happens to people who take on more debt.

People are spending only what they must, saving what they can. QE will not change their mindset in the slightest, in fact, many see it as a panic measure and will be driven to save even more in expectation of a coming collapse.

In the interim, QE will pad bank balance sheets and fund asset grabs.

smcgiff · 22-01-2015 11:30pm

What happens if the banks say, 'no thanks'? It's not as if they have to take the money. And haven't the banks turned down cheap money already. They just don't want it as they cannot lend it on.

1st dalkey dalkey · 22-01-2015 11:38pm

The QE money will buy government bonds from Banks, pension funds etc. They would have bought those bonds as investments and would have large amounts of money tied up in them. By buying them with QE money, central banks will in effect free up the money that was invested in them for use elsewhere in the economy.
The banks don't have to partake, but demand from the Central banks will drive up the value of those bonds in the market generally and make it financially worthwhile.
The question is, what will they do with the freed up money. Is there a demand in the economy to borrow it? Will banks drop their interest rates to borrowers to encourage borrowing? With all the debt already in this economy, is it wise to even suggest such a thing?

strandsman · 23-01-2015 5:05pm

it seems to me to be a load of nonsense, Basically the guy on the street still struggles even if he has a job in a company that got a loan from a bank that got money from the ECB. You are right in what you say 1st dalkey, Even if more jobs are created through this process people will still have limited spending because of high tax and low income, Again I think if countries with huge debts were lowered thus reducing the tax burden on people then more money will be available to spend which would result in increased commercial activity while also paying down personal debt which would free up money for the banks to lend again. Don't be fooled into thinking that these guys at the top of our banking world know everything.... after all they got us into this mess. I doubt Jean claude Trichet is struggling to get by on his ECB pension The only people to gain out of this will be the rich as they will be the bond traders....Oh and the guy on the street??? just give him enough to keep his belly full and he'll be content with that....

BMmeow · 23-01-2015 7:00pm

Will the euro rise against the dollar as a result?

KomradeBishop · 23-01-2015 7:30pm

andrew wrote: »

To put it shortly (and to be clear, no actual paper money is being printed here), the ECB will approach banks and Pension funds, and purchase Government bonds from them. The banks and pension funds will then have to take this money and make other types of investment, like loans to companies, and in this way make it easier for firms to get a loan. This, combined with the effect of a reduced exchange rate, should help the Eurozone economy.

The problem with this though, is that this is known as 'pushing on a string', and the banks won't really be lending out any notably increased amount of money, as the private sector in Europe is already saddled with too much private debt, and do not want more loans/debt.

What QE will do however, is raise asset values - which the wealthy and financial industry in general, have a predominant share of investment in - and this will lead to an increase in growth of inequality in Europe.
Effectively, QE is going to be subsidizing the wealthy and financial industry, with little to no benefit to the everyday person in Europe - and before too long, this effort at QE will fail, and Europe will slip back into deflation again.

So, something in Europe is going to have to give - when the effects of this QE wear off and we turn to deflation again, things will come to a head and we'll probably be looking at a fresh renewal of very turbulent economic crisis (with added political turmoil if that goes on for any length of time) - unless Germany/Europe change course completely, and agree to some kind of large-scale fiscal spending program (that is now, and has always been, the only way out of this crisis).

Amirani · 23-01-2015 8:09pm

BMmeow wrote: »

Will the euro rise against the dollar as a result?

Not in the short term.

Busyness1 · 08-02-2015 2:56am

The intention is for it to drop... more competitiveness, lower interest rates, better environment for business... hence the stimulation element

billyknowsbest · 01-06-2015 3:43pm

Anybody know what zero percent 'inflation' is called? Is it deflation? Is it still inflation? Is it called disinflation or something else?

andrew · 02-06-2015 6:57pm

billyknowsbest wrote: »

Anybody know what zero percent 'inflation' is called? Is it deflation? Is it still inflation? Is it called disinflation or something else?

It doesn't have a specific name like inflation or disinflation.

ECB QE

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