ECB quantitative easing

kdowling

what don't the ECB use quantitative easing and just print money like in the US?

Or is that just kicking the can down the road and if so are the americans just putting off the inevitable return to recession?

The Euro has been devaluing however if they devalue too much then it will devalue pensions & savings in places where devaluation would have no benefit - only the drawback of the devaluation.

Devaluation only suits certain countries also "price stability" is the primary aim of the ECB and they have indicated that they will increase interest rates in July to combat inflation which is the polar opposite of quantitative easing in the US


In theory devaluing a currency can reduce unemployment and erode debts. The scale at which the US is doing so is unprecedented and the world is slightly with oil prices so high - I suppose research into the effects of monetary policy during the 1970s oil crisis would be relevant.

later12

A google entry for "kicking the can down the road" finds that 1.68% of all internet sources for the term originated in Ireland, however one poster over at askaboutmoney commented that it is an American expression. It is of course, a popular United States childrens' game

Reuters have an interesting chart on it


Thankfully, the new normal hasn't quite made its way as a compulsory idiom into smalltalk discourse on the economic situation just yet.

Sorry OP, I completely forget what point you made up until that expression was raised.

tara73

kdowling wrote: »

what don't the ECB use quantitative easing and just print money like in the US?

Or is that just kicking the can down the road and if so are the americans just putting off the inevitable return to recession?

if you do a bit of resaerch on this, you'll find out how dangerous this could be.
seems like an easy way out, but please make yourself familiar with the inflation it can cause.

and with inflation I mean inflation not about the 'normal' few % per year, you might want to read this: http://www.usagold.com/germannightmare.html
to get the picture

tara73

kdowling wrote: »

what don't the ECB use quantitative easing and just print money like in the US?

Or is that just kicking the can down the road and if so are the americans just putting off the inevitable return to recession?

if you do a bit of resaerch on this, you'll find out how dangerous this could be.
seems like an easy way out, but please make yourself familiar with the inflation it can cause.

and with inflation I mean inflation not about the 'normal' few % per year, you might want to read this from history: http://www.usagold.com/germannightmare.html
to get the picture

tara73

sorry, double posted:o

Sea Sharp

tara73 wrote: »

if you do a bit of resaerch on this, you'll find out how dangerous this could be.
seems like an easy way out, but please make yourself familiar with the inflation it can cause.

and with inflation I mean inflation not about the 'normal' few % per year, you might want to read this from history: http://www.usagold.com/germannightmare.html
to get the picture

Hyperinflation happens when there's only a single currency being printed. The value of that currency falls relative to all other currencies.

If everybody does it, everybody falls together and so it cancels out.

It's actually ridiculous that the Euro zone won't print anything. The uncertainty around the banking crisis is devaluing the Euro anyway, and the cost of printing off money for bail-outs would be as significant as slight fluctuations in currency that happen anyway due to wars, etc...

matthew8

Sea Sharp wrote: »

Hyperinflation happens when there's only a single currency being printed. The value of that currency falls relative to all other currencies.

If everybody does it, everybody falls together and so it cancels out.

It's actually ridiculous that the Euro zone won't print anything. The uncertainty around the banking crisis is devaluing the Euro anyway, and the cost of printing off money for bail-outs would be as significant as slight fluctuations in currency that happen anyway due to wars, etc...

So if the elite print money to pay back their own debt it cancels everything out despite the fact that prices go up anyway. More money, higher prices. Or are you saying that all the poor getting poorer cancels everything out?

Sand

No, the effects of hyperinflation are not dependant on other currencies remaining fixed.

If the government is printing dollars, people taking up contracts in dollars will demand more dollars to allow for inflations driving up prices. Which it will.

Then the government has to print more dollars to meet the contracts and a vicious cycle begins. Industrial disputes become more common as unions begin the dog-chasing-tail cycle of trying to get more wages for their members to keep up with the inflation in the economy. Those wage hikes require the government to print more money to pay workers, so inflation hikes up again. Meanwhile, pensions and investors are decimated.

Printing money is not a painless solution. It is a choice and a trade-off. And its not necessarily the most progressive option: In Germany the people who starved during the hyperinflationary period were the least well off.

richiek83

The eventual outcome of all this debt in the periphery of the eurozone may well be the ECB using quantitative easing to once and for all, draw a line on the sovereign debt crisis. Greece will most likely default/ restructure in some way or another, Ireland and Portugal may also have to. As a result of all this, the ECB as the lender of last resort will instead of being the lender of last resort, use quantitative easing to pay back bonds to all those banks and pension funds that hold same. I personally think that's what the markets are looking for. The new incoming ECB Governor, Mr Draghi may take a different approach to Trichet.

While price stability is the primary aim of the ECB, the fact that we are in a crisis should mean that the ECB abandon their primary aim and start an expansionary monetary policy that helps achieve the other two aims which is employment and economic growth. This should only be a temporary measure. Only Germany has some kind of robust growth in Europe at the moment.

Once QE is done, it will reduce the debt burden of the indebted countries. The EU should then be given more powers to reprimand member states that proceed with a pro-cyclical fiscal policy.

tara73

Sea Sharp wrote: »

Hyperinflation happens when there's only a single currency being printed. The value of that currency falls relative to all other currencies.

If everybody does it, everybody falls together and so it cancels out.

?? the euro is a single currency here.
if everybody, every country I guess you mean does it, imo it ends up to the same conclusion, the danger of hyperinflation. sorry, it's not really understandable what you mean..

Sea Sharp wrote: »

It's actually ridiculous that the Euro zone won't print anything. The uncertainty around the banking crisis is devaluing the Euro anyway, and the cost of printing off money for bail-outs would be as significant as slight fluctuations in currency that happen anyway due to wars, etc...

Thank god they don't print it.
you are aware that they don't actually print the bailout money, have it stacked somewhere and then hand it out in cash to greece/ireland ?:rolleyes:
it's numbers on paper/computerscreens with no value to be backed up so highly inflational stuff anyway, no need to print it and make matters worse.

5live

Forgive my ignorance but are the loans provided to Greece Portugal and us just another form of QE in that the bonds issued can be cashed and used to pay down debts to the lenders who then spend it on goods/debt payback

Sea Sharp

tara73 wrote: »

?? the euro is a single currency here.
if everybody, every country I guess you mean does it, imo it ends up to the same conclusion, the danger of hyperinflation. sorry, it's not really understandable what you mean..

Imagine if the USA decides to print dollars, and no other nation/currency does the same with their respective currencies. The USA would run the risk of seeing hyperinflation of the dollar in this scenario.
However, If US dollars, British Pounds, Japanese Yen, European Euros are all being printed for quantitative easing, there will be inflation for all of these currencies, but there will be no hyperinflation because everybody is in the same boat and nobody will see the cost of imports rising exponentially. (And that's the main driving force of hyperinflation; exponentially increasing costs of imports.)

tara73 wrote: »

Thank god they don't print it.
you are aware that they don't actually print the bailout money, have it stacked somewhere and then hand it out in cash to greece/ireland ?:rolleyes:
it's numbers on paper/computerscreens with no value to be backed up so highly inflational stuff anyway, no need to print it and make matters worse.

Yes I am very aware of that. Thanks for clearing it up all the same. If you'd like I can use the expression 'making money out of thin air' instead of 'printing money.':rolleyes:

Yahew

um,

Where is the hyperinflation in the US?

Yahew

5live wrote: »

Forgive my ignorance but are the loans provided to Greece Portugal and us just another form of QE in that the bonds issued can be cashed and used to pay down debts to the lenders who then spend it on goods/debt payback

Not really since the Government is not printing, or electronically, created money.

Sand

@Sea Sharp

(And that's the main driving force of hyperinflation; exponentially increasing costs of imports.)

No its not. The main driving force of inflation/hyperinflation is increased money supply, all other things being equal.

Sea Sharp

Sand wrote: »

No, the effects of hyperinflation are not dependant on other currencies remaining fixed.

If the government is printing dollars, people taking up contracts in dollars will demand more dollars to allow for inflations driving up prices. Which it will.

Then the government has to print more dollars to meet the contracts and a vicious cycle begins. Industrial disputes become more common as unions begin the dog-chasing-tail cycle of trying to get more wages for their members to keep up with the inflation in the economy. Those wage hikes require the government to print more money to pay workers, so inflation hikes up again. Meanwhile, pensions and investors are decimated.

I'm going to have to disagree with you on this. The vicious cycle would be triggered by inflated costs of imports, namely food and oil. However if the nations / currencies that you are importing from are also partaking in quantitative easing then costs of imports won't rocket triggering the cycle you've described. We would see inflation, but not hyperinflation.

Sand wrote: »

Printing money is not a painless solution. It is a choice and a trade-off. And its not necessarily the most progressive option: In Germany the people who starved during the hyperinflationary period were the least well off.

I agree, it's a trade-off. But looking at the European crisis; the current course of action is to hold taxpayers of Ireland, Greece etc accountable for bank losses. This is a recipe for disaster. If the ECB used QE to cover bank losses it
holds anybody who possesses Euros accountable for the losses as opposed to nations that will almost certainly not be able to pay up.

johnnyskeleton

Sea Sharp wrote: »

I'm going to have to disagree with you on this. The vicious cycle would be triggered by inflated costs of imports, namely food and oil. However if the nations / currencies that you are importing from are also partaking in quantitative easing then costs of imports won't rocket triggering the cycle you've described. We would see inflation, but not hyperinflation.

Yes they would. Take a dual system where quantitative easing increases the value of a loaf of bread (produced by country A) from £1 to £2 as the money supply doubles while the amount of bread stays the same. Country B also has a separate but identical QE scheme which means that rollerskates go from $10 to $20. The exchange rate travels up at the same time, so because they both double the money supply, £1=$2 at all times. At the start, £10 buys 10 loaves of bread or two pairs of rollerskates and $10 buys the same thing. After the QE trickles through, £10 buys 5 loaves of bread or one pair of rollerskates and $20 buys the same.

So in both scenarios, the fact that they both have QE doesn't mean that neither country has hyperinflation, it means that both countries experience hyperinflation at the same rate.

Yahew

So where is the Hyperinflation in the US?

If the ECB used QE to cover bank losses it
holds anybody who possesses Euros accountable for the losses as opposed to nations that will almost certainly not be able to pay up.

Its a tax on all holders of Euro's rather than tax payers in the European union. As something which will cause the reduction of the value of holdings in the Euro it taxes wealth holders ( including non-European holders of bonds) not tax payers.

tara73

Sea Sharp wrote: »

Imagine if the USA decides to print dollars, and no other nation/currency does the same with their respective currencies. The USA would run the risk of seeing hyperinflation of the dollar in this scenario.
However, If US dollars, British Pounds, Japanese Yen, European Euros are all being printed for quantitative easing, there will be inflation for all of these currencies, but there will be no hyperinflation because everybody is in the same boat and nobody will see the cost of imports rising exponentially.

this is just pure theory, not really going to happen and not practical at all I would say.

Sea Sharp wrote: »

And that's the main driving force of hyperinflation; exponentially increasing costs of imports.)

this sounds written down out of the blue to me as well, do you have anything to back it up, source?

Yahew

How about, before he points to his "sources" the Austrians prove that QE has caused Hyperinflation in the US, or is about to.

Sand

@Sea Sharp

I believe youre confusing symptom with cause. Increase of the supply of money leads to a fall in the value of that money. So you need more more money to buy any given service or good all other things being equal. This applies equally to both domestically produced goods and foreign produced goods, including foreign currency. The root cause is the increased money supply, not the fall in the exchange rate.

As Tara's link indicates, the Germans were similarly convinced their hyperinflation was caused by the falling value of the mark vs. foreign currencies. So they expended vast quantities of their gold and foreign currency reserves buying up marks to support the value of the mark. However, the real cause was whirring away in the vaults beneath their feet - the printing presses which were rapidly increasing the supply of Marks in circulation.

As for inflation vs. hyperinflation - the difference is vague. Hyperinflation is probably best expressed as a situation where significant inflation is recognised and factored into everyones choices - to the point where people burn cash instead of firewood because its cheaper in real terms.

Oh yeah OP - the reason the ECB isnt simply making/printing money is because they cant...they have a target of 2% inflation which is inserted as law in the treaties at German insistence. So they simply cant. The 2% inflation target was supposed to have a chastening effect, so that people would ensure they would never find themselves in a situation where they wanted 5% or 10% inflation to get rid of debt. But I guess no one really thought those Treaties were seriously serious. I guess we know now that they werent kidding. If the mountain will not come to Muhammad, then Muhammad must go to the mountain.

tara73

@sand

thanks for summarising it up so nicely:)

@sea sharp

did you read my link at all??

Sea Sharp

johnnyskeleton wrote: »

Yes they would. Take a dual system where quantitative easing increases the value of a loaf of bread (produced by country A) from £1 to £2 as the money supply doubles while the amount of bread stays the same. Country B also has a separate but identical QE scheme which means that rollerskates go from $10 to $20. The exchange rate travels up at the same time, so because they both double the money supply, £1=$2 at all times. At the start, £10 buys 10 loaves of bread or two pairs of rollerskates and $10 buys the same thing. After the QE trickles through, £10 buys 5 loaves of bread or one pair of rollerskates and $20 buys the same.

So in both scenarios, the fact that they both have QE doesn't mean that neither country has hyperinflation, it means that both countries experience hyperinflation at the same rate.

That's inflation, not hyperinflation. (Although 100% inflation is hyperinflation, the figures in that scenario wouldn't be so high.)

Hyperinflation would be:
Country A uses dollars and decides to print a load of money.
Investors that own dollars from Country A says "Crap, this currency is devaluing, I'm going sell all my dollars and buy Euros instead" Collectively this devalues the dollar. When a person from country A wants to buy a loaf of bread from someone who uses Euros not dollars the person with Euros says Your currency is sh1t, I want $4 instead of $2.
The government of the poor consumer realises that the cost of bread is soaring, and their solution is to print more money, and the hyperinflation cycle begins.

johnnyskeleton

Sea Sharp wrote: »

That's inflation, not hyperinflation. (Although 100% inflation is hyperinflation, the figures in that scenario wouldn't be so high.)

I'm not sure you understand the term. Hyperinflation is not substantially different to inflation, it is a matter of degree. Inflation is a fairly normal occurence whereas hyperinflation is abnormal. Most would class an overnight increase of 100% as hyperinflation.

Sea Sharp wrote: »

Hyperinflation would be:
Country A uses dollars and decides to print a load of money.
Investors that own dollars from Country A says "Crap, this currency is devaluing, I'm going sell all my dollars and buy Euros instead" Collectively this devalues the dollar. When a person from country A wants to buy a loaf of bread from someone who uses Euros not dollars the person with Euros says Your currency is sh1t, I want $4 instead of $2.
The government of the poor consumer realises that the cost of bread is soaring, and their solution is to print more money, and the hyperinflation cycle begins.

That's not how it works I'm afraid. As has been pointed out several times, inflation is the rise in prices of goods (effect) as a result of an increase in the money supply relative to the value of goods (cause). The inter-currency exchange rate is not the same thing (although in practical terms an increase in money without an increase in underlying weath decreases the value so this results in a decrease in the exchange rate). Speculation in foreign exchange markets can have an effect on the exchange rate over the short term, but not over the long term (if you look at the Euro, every time there is a "crisis of confidence" it devalues, only to regain its value a short time later).

I suggest that you look up inflation and/or hyperinflation, even in wikipedia.

Sea Sharp

johnnyskeleton wrote: »

I'm not sure you understand the term. Hyperinflation is not substantially different to inflation, it is a matter of degree. Inflation is a fairly normal occurence whereas hyperinflation is abnormal. Most would class an overnight increase of 100% as hyperinflation.

You're right. Just to clarify; when I used the term hyperinflation I was referring to what happened in 1920s Germany and more recently in Zimbabwe. I'll be sure to use 'severe hyperinflation' instead of 'hyperinflation' in future.
I don't believe that QE by the USA, UK, Japan etc since 2008 will lead to severe hyperinflation, I do believe that we'll see something similar to the inflation of the 1970s though.

johnnyskeleton wrote: »

That's not how it works I'm afraid. As has been pointed out several times, inflation is the rise in prices of goods (effect) as a result of an increase in the money supply relative to the value of goods (cause).

The inflation of the 1970s was caused by the oil crisis. AKA soaring import costs.

johnnyskeleton wrote: »

The inter-currency exchange rate is not the same thing (although in practical terms an increase in money without an increase in underlying weath decreases the value so this results in a decrease in the exchange rate). Speculation in foreign exchange markets can have an effect on the exchange rate over the short term, but not over the long term (if you look at the Euro, every time there is a "crisis of confidence" it devalues, only to regain its value a short time later).

I still maintain that the severity of inflation caused by QE will be diluted if QE is being implemented globally as opposed to on just one currency. If one currency is QEing and nobody else is, market speculation will devalue that currency. However in this scenario, it will not 'regain its value a short time later'. This is due to the simple fact that having wealth in a currency that is not subject to the effects of QE is safer than the alternative. If everybody is printing money then there is no safe haven and so this no longer a contributing factor for inflation.