The FT has reported this morning that:
Some 57 per cent of all outstanding German government bond debt with a maturity of more than a year now trades at yields below zero, according to Citigroup. Almost a third trades below minus 0.2 per cent, a rate below which the ECB has said it will not buy assets.
A shortage of German debt could eventually force a change of tactics by the ECB. It has already said it will buy bonds issued by agencies such as the KfW, the German development bank, but will this week review the list of agencies whose debt is eligible.
A number of observations follow. The first is QE cannot work if it is solely going to pump money into financial markets that cannot use it. This is what the negative interest rates reveal: there is no use for this money.
Second, it is obvious that long-term deflation is being built into pricing assumptions. It is assumed that there is no economic recovery in sight.
Third, there is a shortage and not a glut of debt for QE if other demands for government debt are to be met. I am aware that this is a German situation, but it is a scenario that could very easily be replicated and already is in Switzerland.
And last, all these suggest that a QE programme is wrong at this time. What is really required is an economic stimulus using interest free money that behaves as if it is an equity stake in the activities in which it is invested. That means green QE is needed now, and not QE, precisely because green QE creates the demand for the money at the same time as the money is created. And that is what is really required.
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Your last paragraph is just what the doctor ordered!
Richard, first of all thanks for all that you do with this blog. It is a powerful antidote to the (erroneous)impression that the FT and Money Week adverts on twitter have all the answers on matters of economics! I can’t yet claim to understand it all (avoided Economics at A-Level many years ago so a lot of this feels a bit like trying to understand quantum theory)but I am working my way through it (and The Courageous State) steadily.
I have a question (which may be born of the same ignorance). Does the promise to give power to the Green Investment Bank to borrow money represent a step in the direction of Green Infrastructure QE? I apologise if that is pre-GCSE basic!
All the best
Andy
Thanks!
Giving borrowing powers is vital
But they have to be seriously big ones to make Green QE vital
At the moment they are tinkering
Richard,
I feel, also, that cheques should be sent to all citizens, below an acceptable level of income, as well. Talk about direct injections of liquidity!
Now, I do have some qualms as well as the funds need to be directed to socially acceptable areas, not just spent on ‘stuff’.
I’d prefer investment in job creation rather than consumer booms
Richard,
It would only be meant as a token amount to assure buy in from the people for Green QE. Possibly only allowed to be spent on QE related items.
Another virtuous circle.