What's so scary about Eurozone quantative easing?

Solair

I was watching Prime Time's debate on the Irish economy and I am a little baffled by something.

What's so wrong or so risky about the Eurozone printing more currency?

The Eurozone is the world's largest economic bloc. We do most of our trade *with ourselves*. We have sufficient resources in the Eurozone to supply all of our needs.

It would boost European manufacturing, deal with the debt crisis across the entire Eurozone and it would make little / no difference to the average person other than that things from outside the Eurozone more expensive.

European countries also have enormous tax on energy produced from oil, so we could simply reduce some of these to cushion against Q.E.

The US wouldn't have that option as tax on petrol etc is far lower.

Also, if the United States and the UK etc are willing to cooperate on such a Q.E. programme, then we could all inflate together and all we would do is undermine China!

Q.E. is only a risk if you're a small country printing money in your own currency on your own when you have to trade into countries that use a much stronger currency as is the case with Iceland at the moment or even the UK.

If you mostly trade with yourself and your other major trade partners are also printing cash, then I fail to see how it would impact on anything other than balancing out the currency and cost games that China has been playing that have damaged EU and US exports.

Surely the whole advantage of being a big single currency bloc is that we can throw our weight around like this.

I fear that the Eurozone is still stuck in 'small country' mode.

Sticky_Fingers

While I can't comment on the merits or pitfalls associated with QE I think the opposition shown towards it is somewhat coloured by Germanys experience with hyper inflation during the Weimar Republic after WW1. The Germans seem to have a pathological fear of history repeating itself and would fight tooth and nail against any attempts to inflate the money supply.

There are probably far more valid reasons for the Eurozone opting not to actively devalue the currency but I'm sure the German position is part of it.

maninasia

If the debts are mostly intra European I could see it being a positive thing to a certain degree and it would make the Eurozone more competitive, besides the US and China does the same thing.
I haven't seen a coherent argument against it either.

ei.sdraob

inflation is the main fear, just look at UK

of course inflation would hit the people who can least afford to be hit the most...

gigino

• Inflation in small amounts would be better than cuts and deflation. People are afraid to spend money now because things are getting cheaper. Deflation is the enemy.
• The only way negative equity mortgage holders - and therefore the banks - will get out of the mess is if there is gradual inflation.
• Never mind the bl**dy germans - it they did not lend money to us during the boom, and insist on keeping interest rates to suit themselves - and which were way too low for ourselves - we would not be in the mess we are in.

macannrb

the ECB is controlled mainly by germans, who are very fearful of inflation. Look at what happened just before WW2.

Also germans are getting oldered and printing money/inflation would devalue those savings

Sea Sharp

I agree.

The big fear preventing the European Union from doing the same thing as the majority of other large currencies is a lack of understanding about the inflation that will occur with quantitive easing.

If we jump on the band wagon with the UK, Japan, USA etc and print money, all that will happen is that the value of the currencies in nations that have developed a lot over the last two decades will rise relatively.

The EU could just print money for to pay for the majority of debts that are considered irrepayable.

The only consequence will that the EUro will fall in value as much as the dollar and pound have.

A fall in value for the euro will cause a boost in exports throughout the EU, which will help to reduce the massive unemployment numbers we ahve all developed in the last three years.

Solair

The UK is not comparable with the Eurozone, it's one average sized country inflating and printing money all by itself and it's tied into massive trade with the Eurozone which is maintaining a strong currency policy which is, of course, driving British consumer prices through the roof.

The majority of consumer products sold in Europe, including the UK, are really priced in Euro. This particularly applies to food products, manufactured goods i.e. cars, domestic appliances, electronics, etc etc.

If the entire Eurozone prints and devalues, I really cannot see how there would be much inflation for most goods other than Chinese products. There might be some impact to electronics and those kinds of goods which are produced in non Euro/Dollar influenced areas.

If the process were coordinated with the US, Japan, UK and other interested countries, then we could end up in a situation where we rebalance the books very quickly and regain a lot of competitive edge over China in particular.

As I see it, we have to start thinking like on the Matrix. The huge central banks that are the ECB and the Fed effectively control economic reality. The ECB in particular, does not seem to realise this or is hamstrung by legislation and paranoid Germans.

The European and US debt crisis situations are not going to resolve themselves and the approach being adopted by the EU is going to lead to social disasters in Ireland, Spain, Belgium, Portugal, and an increasing number of countries as they all hit the grinder as time goes on.

It's just not economically or mathematically possible to pay down some of these debts by extorting money out of tax payers and reducing public services.

Also, there is a very serious risk that if this kind of policy is not pursued that cash-strapped states in debt trouble e.g. Ireland, Portugal, Spain and Italy and also Belgium and Austria may start to borrow from China.

That will simply turn an internal EU debt crisis in to an international one which we cannot resolve easily as the money will be owed to entities outside the Eurozone.

Even debts owed in US$ are potentially resolvable as the US would quite likely cooperate with such a scheme.

We need to do something and do something quickly!

Punishing individual countries, or individual states is not going to achieve anything other than short term political popularity for right wing politicians in France and Germany.

We are looking at complete system-failure here if we don't move quickly.

whiteonion

How is printing money going to help. More money chasing the same amount of goods and services will just make life more difficult for normal people. How will companies earn more money if people end up with less money for spending on other things than the bare essentials?

ei.sdraob

@Solair

we are already seeing some inflation in fuels due to oil being priced in dollars

Solair wrote: »

Punishing individual countries, or individual states is not going to achieve anything other than short term political popularity for right wing politicians in France and Germany.
.

printing euros punishes everyone holding the euro, every person and every company that uses euros for savings and trade

there is no free lunch, no easy way out

Sticky_Fingers

whiteonion wrote: »

How is printing money going to help. More money chasing the same amount of goods and services will just make life more difficult for normal people. How will companies earn more money if people end up with less money for spending on other things than the bare essentials?

Printing money will bring down the "value" of the currency and thus any debt that is held in that currency. It's good news for countries in debt as well as exporters but not so good if you are an importer or a saver.

ilovelamp2000

And it will continue to increase the price of commodities.

Cheap money policies over the last decade is what has us in the mess we're in now, I'm not sure they'll sort it out as well.

johnnyskeleton

1. There already are limited forms of QE going on in the eurozone at the moment. The ECB is buying up bank debt with printed money. The money that has gone into the Irish banking system from the ECB, in the region of over 100bn, has effectively been created by QE.

2. The experience in the US and UK is that by and large the QE money hasn't yet trickled into the real economy. Therefore, looking at the US and UK and saying things aren't that bad is a bit misleading because we haven't yet seen its full effect. Print too much money, and once the economy starts to improve you are fairly suddenly hit with a massive chunk of free money which cases high or even hyper inflation, thus destroying more businessess than deflation does.

3. QE is basically a means of decreasing the purchasing power of someone with euro assets in order to decrease the level of debt held by debtors. I find this to be an unfair move. Why should the prudent have to pay again (we are already paying in higher taxes) for the mistakes of the imprudent? I don't see why policy should be dictated by the indebted. Many business would become unworkable in a high inflation environment due to the delays between invoicing and being paid.

4. The level of spending during the boom is unsustainable, and we have to shrink back to a baseline where there is much less credit in the economy.

5. If things ever get to breaking point, we will have QE in reserve. The US and UK don't have that luxury, and their economies are still in trouble.

6. If the economy levels out and demand picks up, at that point the eurozone may want to consider monetary stimulus. But it is too early in the cycle to do so in my view.

ei.sdraob

johnnyskeleton wrote: »

The experience in the US and UK is that by and large the QE money hasn't yet trickled into the real economy.

Alot of the money went east, fueling an epic bubble there which will end in tears.

Like someone already mentioned this is like fighting fire with fire, crazy monetary policies in europe and us and japan have led to where we are, more of the same will lead to ???

johnnyskeleton

ei.sdraob wrote: »

Alot of the money went east, fueling an epic bubble there which will end in tears.

Like someone already mentioned this is like fighting fire with fire, crazy monetary policies in europe and us and japan have led to where we are, more of the same will lead to ???

Exactly, this has to stop.

But in order to stop it, we have to end this obsession with constant growth. We should be trying to aim for a sustainable economy and once we reach that point, any growth is due to actual productivity increases rather than because of credit bubbles or ill advised government schemes.

ei.sdraob

johnnyskeleton wrote: »

Exactly, this has to stop.

But in order to stop it, we have to end this obsession with constant growth. We should be trying to aim for a sustainable economy and once we reach that point, any growth is due to actual productivity increases rather than because of credit bubbles or ill advised government schemes.

While the word "sustainable" has been abused to death and hijacked by politicians :P

I do agree with you growth should come from science and engineering and productivity gains, using accounting tricks and smokes+mirrors on the whole economy has led us to where we are, i dont see how more of the same will fix the problems.

whiteonion

Printing money is never a good idea. History has proven this in Zimbabwe, Hungary, Germany etc.

Solair

ei.sdraob wrote: »

@Solair

we are already seeing some inflation in fuels due to oil being priced in dollars




printing euros punishes everyone holding the euro, every person and every company that uses euros for savings and trade

there is no free lunch, no easy way out

We are experiencing oil price hikes because the price per barrel in dollars has drastically increased, not because of Euro vs US dollars exchange rates.

whiteonion

Solair wrote: »

We are experiencing oil price hikes because the price per barrel in dollars has drastically increased, not because of Euro vs US dollars exchange rates.

When there is a huge amount of money printing going on, this money has to go somewhere. Speculation in commodities with new money leads to increases in commodity prices. We would not have seen this strong development in commodities if there was no QE from USA or Europe.

CelticRambler

johnnyskeleton wrote: »

we have to end this obsession with constant growth. We should be trying to aim for a sustainable economy and once we reach that point, any growth is due to actual productivity increases rather than because of credit bubbles or ill advised government schemes.

Agreed, 90% anyway. "Sustainable" and "Growth" are mutually exclusive terms when applied long-term to the economy. Sustainable means 0% growth; anything above that will ultimately lead to an end. Any farmer or gardener will tell you that the more you maximise growth(-rate) the sooner you reach the point of slaughter or harvest.

For many centuries, society as a whole was happy with a modest "harvest" situation, chastened by occasional excesses like the South Sea Bubble. Then for some reason we switched en masse to wanting a high-growth short-term economy. Now - especially in Ireland - it's slaughter time.

The worst of the OPs question is not the notion of "printing money." Rather it's the underlying desperation - shared by almost every election candidate and most "think-tank" advisors - of trying to get back to this same point again! :eek: Again, as any gardener will testify, when some part of your landscape has been totally trashed, the best way to "recover" is to take advantage of the opportunity to do something completely different.

And for those who think the agricultural analogy is simplistic, don't forget that at the root of all economies is food production. Governments (and North African dictators ) have been overthrown over the price of bread.

catbear

I think we've missed a very important point, Ireland has had it's inflation in the housing bubble. Housing became the economy. Even if we did devalue the Euro, productive economies elsewhere in the Eurozone will still be cheaper by property valuations and hence we'd still be deflating.

It's a debt trap regardless of currency and co-ordinated writedowns in return for control of our economy is the only option. This will cause political and social tensions within Ireland but overall the Eurozone trundles along.

Our inflation is already baked in and the only relief on the horizon as someone else said is inflation through commodities. Even then what gains we make will be taken in raised taxes just to repay money borrowed in one decade to supply the country with a housing surplus worth forty five years of new home demand.

As these house are the most illiquid of assets, to get cash for them now means we need to attract buyers from outside. If I had german I would seriously consider setting up an EA office there. When germans buy abroad they generally cluster. Offering ghost estates in rural locations allows german towns to pop up in the fresh clean west atlantic seaboard which has more appeal on the continent than you'd imagine.

But then there's Spain, Portugal etc..

Solair

Well the only other solution being proposed is "internal deflation" which is effectively grinding poverty and forcing the banking debts onto local tax payers.

The result of the current policies being pursued will quite simply be falling living standards in Ireland, probably in Spain and Portugal too.

In the Irish context, all we are going to see is unemployment, mass emigration and ultimately sovereign default which, if repeated in Spain will completely finish the entire Euro project.

ei.sdraob

Solair wrote: »

We are experiencing oil price hikes because the price per barrel in dollars has drastically increased, not because of Euro vs US dollars exchange rates.

You have things upside down

its not the price of oil thats increasing, its the value of the dollar thats plummeting thanks to money printing something like 3x the amount of dollars in existence where created in last few years, the ratio of the price of gold to oil has remained remarkably static over the decades with the fluctuations in the 0.1 +/- 0.05 ratio range in over 110 years

billyknowsbest

Anyone know the answer to this. When the Bank of England does QE it buys up bonds from financial institutions. Does it pay interest on these bonds; How does that work? Or is it just a once off purchase?

Icepick

inflation

reckless spending

money going into bubbles

Geuze

billyknowsbest wrote: »

Anyone know the answer to this. When the Bank of England does QE it buys up bonds from financial institutions. Does it pay interest on these bonds; How does that work? Or is it just a once off purchase?

Well in the USA, yes, the central bank has bought huge amounts of Govt bonds as part of QE.

So the Fed has made huge asset purchases.

Pay interest? As the central bank has bought bonds, it earns the interest on the bond.

Once off?

The UK central bank spent 325 or 375 bn sterling buying bonds, spread over many months/years.

Geuze

See here:

http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx

maninasia

Geuze wrote: »

Well in the USA, yes, the central bank has bought huge amounts of Govt bonds as part of QE.

So the Fed has made huge asset purchases.

Pay interest? As the central bank has bought bonds, it earns the interest on the bond.

Once off?

The UK central bank spent 325 or 375 bn sterling buying bonds, spread over many months/years.

I guess you mean the Federal Reserve buys the bonds as the US doesn't have a central bank.

It's not one off but an ongoing process. It's used to combat deflation by putting more money into the system. The financial types LURRVVE quantitative easing it's effectively a subsidy, money for nothing, and guarantees they get their bonuses at the end of the year. They get the money almost free and then make money on the spread.

billyknowsbest

Thanks manasia and geuze, that clears things up. So, the CB earns interest form buying these bonds, is the interest paid by the insurance companies/pension funds?

srsly78

Bonds pay what is known as a coupon from the issuer to the holder, this is the interest payment you refer to. http://en.wikipedia.org/wiki/Coupon_(bond)

If the CB holds the bond, then the government (that issued the bond) effectively pays the coupon to the CB. This may mean the Irish government paying coupons to the ECB for example.

This is the case with government bonds. There are also corporate bonds, in which case a company is the issuer.

Additionally there can be "zero coupon" bonds. And even crazier stuff, like the perpetual bonds issued by the UK to fund WW1 (not crazy at all when you are fighting for your life): http://en.wikipedia.org/wiki/Perpetual_bond

Geuze

billyknowsbest wrote: »

Thanks manasia and geuze, that clears things up. So, the CB earns interest form buying these bonds, is the interest paid by the insurance companies/pension funds?

The bonds bought by CB engaged in QE are typically Govt bonds.

Example:

Govt runs a fiscal deficit, so Govt borrows by issuing bonds.

Bonds bought by banks / pension funds / savings funds, etc.

Time passes.

Economy in recession, CB responds by cutting int rates and then starts to buy financial assets, paying for them by increasing money supply.

CB enters the secondary market and buys the existing Govt bonds off the existing owners.

Results:

Govt bond prices are pushed up
Govt bond yields are driven down
General long-term interest rates fall in line with bond yields
CB balance sheet massively expands, as they buy loads of financial assets
CB hopes that as banks sell bonds, they will use the proceeds to make more loans

billyknowsbest

On the subject of interest rates, how can higher interest rates push up a currency's value? Higher interest rates attract foreign investors, but why should that make a currency stronger?

Sheldons Brain

Higher interest rates attract foreign investors, but why should that make a currency stronger?

Supply and demand. If more people want to buy the currency, the price goes up.