The European Central Bank has launched its QE programme, which is planned to print €1.1 trillion (that's €1,100,000,000,000) of money in the Eurozone over the next two years.
Let's put this number in context. The EU tax gap - that is money unpaid because of tax avoidance and tax evasion over this period will be bigger than that. I have estimated this loss to exceed €1 trillion a year.
And let's also contextualise this: the EU as a whole has GDP of €13 trillion.
However looked at then the QE programme that has been announced is enormous. So why do it? The aim is simple: it is stated that the aim is to create inflation of 2% when the Eurozone is currently suffering deflation which could become endemic if not addressed.
But, and there is an enormous but to this, whilst the QE programme might achieve the goal of inflation (and might not) whether it does so or not the cost will be enormous.
I stress, I am not opposed to money printing, which is what this programme is.
Nor am I opposed to central banks buying government debt (which I suspect the vast majority of this will be) knowing it will never sell it again, which permanence is inevitable in the current case because there is no situation that I can foresee where markets will ever have the capacity to reacquire the debts now to be purchased by the ECB.
Let's then be under no illusion: this is a debt cancellation programme through the creation of new money and those who suggest otherwise are as deluded as those who think Greece will now repay all its national debt. All if that is fine, acceptable, and indeed what is needed right now to restore inflation.
What is not needed though is the consequence of this particular type of QE programme which will buy back debt from banks and other financial institutions. These organisations have in recent years proved themselves entirely clueless in the art of investing money for social benefit. Despite this the QE programme will leave these bodies awash with cash. There are inevitable consequences.
First, because these bodies only invest in the private sector and there is no demand for new cash for private sector investment in the EU, or beyond it, this money will not be invested in new productive capital. Not a new job will be created as a result. Not a single social need will be met. Instead the money will be used for speculation. That may be in stock markets, but as much will be in commodities, and because all players in these markets will have more money to gamble the result is inevitable: asset prices will rise, significantly and artificially. This will not be the market at play, this will be distortion. There will be a boom. A bust will follow.
But in the meantime market gamblers will celebrate their profits, acclaim their abilities, and demand their bonuses. A few will get very rich indeed. Many will pay the inflated commodity prices and vast numbers of young people will end up priced even further out of property markets, where a few will purchase considerable portfolios and yet more trophy apartments that prevent access to housing at affordable prices to millions.
This will be socialism for the rich.
There is an alternative. The Green QE programme I have promoted would also involve central bank purchasing of debt, but this would be debt issued to fund hospital, school and infrastructure programmes as well as green energy and energy saving programmes to provide long term benefit to the society at large.
This programme would create jobs in every town and most villages throughout Europe. It would deliver social value. It would create inflation because ordinary people would have more money in their pockets because of increased employment and because wages and not asset prices would have been forced up.
This programme would not lead to bust: this programme would build the housing and other resources Europe needs. And this programme would deliver skills, hope and prosperity, and as costlessly in terms of money creation as the planned QE programme, because just as in that case none of this debt would ever be repaid. It's a costless injection into the real economy, not the speculative one.
I am not opposed to turning on the money printing presses. But I am if the result is a boom to be followed by a bust with a few benefitting enormously at cost to many in the meantime. That's what we're getting and that is tragic when an alternative exists that could deliver so much social benefit. This is the time for QE, but Green QE is what we need and is not what we're getting.
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More evidence then I’m right to say we can’t expect any help from the ‘authorities’ whose sole aim is creating an oligarchy which will include only they themselves. We have to look to our own resources now and implement local currencies and local food supplies which means creating farms of all description.
One has to ask why this money is available to be given away to banks and not available for public spending. In addition to any green issues why is it not available to pay Greek teachers and nurses or to re-open the railway in the Peloponnese?
Will the financial institutions use the money to offer loans to workers who are denied a pay rise, & with what consequences?
It would be available if every country in the EU – including the UK – hadn’t signed away their sovereignty at Maastricht. The UK is fortunate that by not being in the Eurozone it can duck the full force of Maastricht which obviously prevents the printing of new debt-free money to finance spending. Because the pound is still a Sovereign currency we are able to get around this by creating money to buy back previously issued bonds. So, in theory, if it weren’t for us having committed to Maastricht, the UK could lead the world out of this mess by upping the use of new debt-free money, rather than buying back gilts, whilst hiking up commercial bank capital reserve requirements in order to restrict their creation of money as debt to themselves and at the same time prevent them promoting Boom and Bust which is embedded into their DNA, as they would say in Private Eye! Given the current hopeless state of affairs in the Eurozone there might just be a window when it is possible to exit the EU – or simply revoke Maastricht? – start using a sensible amount of new sovereign money without inviting a collapse in the pound’s standing. It will not be easy given the threat offered against the pound by those vested interests in banking and financial services who are thriving upon the current dysfunctional unsustainable monetary/banking system. But it might just be possible at this point in time to make a break through and, like a dam, once it starts the flood would follow. Bye-bye much of the debt and bye-bye most of the obscene salaries and bonuses; and if we change the tax system to point of sale/use possibly bye-bye all of the non-taxing paying opportunistic corporations.
My last point re tax at point of sale to prevent taxation being shipped to
tax havens through interest charges might tie in with
[a] abolishing or at least phasing out tax relief on interest payments
[b] the reduction in interest payments through the progressive reduction
private and corporate debt
[c] reduction in taxation through progressive annihilation of public debt
Mark Carney has confirmed in writing to Caroline Lucas there is n technical objection to Green QE
It follows there is only a political one
Richard, I do believe Carney is “on-side” along with Turner – plus even Soros who seems to have gone philanthropic in his dotage! – on radically changing the system; but both have to tread carefully given that the vested interests and bond vigilantes would turn against them very readily!
The consequences would be further wealth extraction. It would further widen the gap between the rich and the poor, which is what the economy is designed to do.
Bill, I presume your reply is to “lionsafterslumber”? If not and it is to mine please elaborate!
Yes, QE means the ECB buying bonds from banks but where do they get them? From the governments. The banks only act as intermediaries in the process for two reasons; first, it maintains a liquid market in government bonds and ensures that the ECB buys at a ‘fair’ price and second, direct purchases from governments are illegal under the Maastricht Treaty.
I doubt that the banking sector as a whole will change its holdings of government debt as most of it is held to meet liquidity regulations. So, in effect QE allows governments to spend more money without the inconvenience of having to raise it through tax or borrowing.
So, the problem, as I see it, is the unwillingness of governments to us this ability properly and engage in ‘deficit investment’. It is the right QE but governments are squandering the opportunity it offers!
Not sure if it’s as simple as you make out because under Maastricht the Eurozone countries are hamstrung as they don’t have their own central banks.So Governments cannot just “spend more money without the inconvenience of having to raise it through tax or borrowing.” The other problem is that the system is intrinsically dysfunctional! Although clearly banks cannot create money for themselves to buy bonds but they can do so for one another.
Agreed: Maastricht is the problem
And the Germans will not change it, I am sure
I read a plan, a few years ago, by MMT writer Warren Mosler to progressively retire the public debt of the eurozone over a period of years. While that might be feasible, the need is for more immediate action. It is not about balancing figures but giving the possibility of a decent life for millions of people. Green QE addresses the real issues. I despair at the inability of leaders and commentators to see beyond their economic theories.
332.9 million people in the Eurozone. 1.1 trillion… that’s maths my calculator won’t even do, but why don’t they just give everyone 332.0/1.1tn? And then can I have my five grand of QE? (http://tiintax.com/2015/01/22/the-emperors-clothes/) I promise to spend it, honest!
About €3,300 each
Why not?
Because that does not reduce debt, does boost consumption and does lead to the money flowing out of the EU without a single job necessarily created
Or to be unsubtle, it’s pouring the money away
I want it invested for the common good and long term gain
I think we both have the same aims. But I’m not convinced that giving money to the banks isn’t also “pouring it away” – I’d just rather the rest of us had a bit of fun with it too! Yes, I’m not entirely serious, but I don’t see the political will behind getting any kind of green or investment bank going, much as I’d welcome them.
Giving it to the banks is, I agree pouring it away
Actually ‘helicopter money’ (your plan) is better than that
This may sound a facile question but I’m deadly serious: I work that sum out at around €2,200 among every person in the EU. What would be economically wrong about giving every person in the EU with a voucher for that amount to be spent on goods and/or services within 24 months?
Because most of the gain would then go to China
Why do that?
We need to invest for the long term here, not subsidise jobs elsewhere
A recently published article in the Daily Telegraph (yes) rather underlines this post – ‘Billions printed in Frankfurt will wash across the Channel’ – Mathew Lynn 19/01/15. I cannot recall a better indictment of the current economic system, and from one of its proponents and beneficiaries. A few quotes will give the general flavour –
“Draghi’s “big bazooka”, as the markets have started calling it, is going to shape our economy for the next year. What will it impact? London property will get another boost, City traders will be swilling champagne in anticipation of some easy money..”
“The banks won’t want to lend to Italian or Greek companies just because they have a lot more money on their balance sheet. So if a trillion euros get printed in Frankfurt, a lot of it will wash its way across the English Channel.”
“The City will benefit mightily, even if the real economies don’t. Expect some much bigger bonuses next Christmas — and even more demand for those smart central London properties.”
Lynn’s paragraph headings are – ‘Soaring London property prices’, ‘A boost for the City’, ‘Booming equity markets’ ‘Depressed manufacturing’ and ‘Negative interest rates’ (admittedly, the last two mainly for the UK).
The article can be found at – http://www.telegraph.co.uk/finance/economics/11355367/Billions-printed-in-Frankfurt-will-wash-across-the-Channel.html
Chris Smith
Indeed
And if Lynn can work that out then it means it cannot be beyond the wit of Draghi and his associates and advisers at the ECB to have worked it out either. Which leaves one wondering what the governments of Italy, Spain, Greece and any other country that thought it might be a beneficiary of this policy is left thinking. Presumably this is simply a very macro example of “trickle down” – the dregs of what isn’t swallowed up by the City and bankers everywhere will just about trickle down to those that most need it. Surprise, surprise!
Hopefully they’re beginning to agree with me. The more power there is in a position, the more it appeals to those least suited, from a societal POV, top hold it. Small is indeed beautiful.
I’d like to hope the europeans will use this opportunity more wisely than we did.
Next steps;
1 The Greeks elect a Govt that reneges on its debts
2 Large numbers of banks seek Govt bail-out
NOW THE DIFFERENCE
3 The European countries nationalise the banks in question
4 They insist that the highest paid employees on those banks can receive no more than the maximum civil service salary
5 They pour the newly created €s into those banks with instructions that they be lent out to small businesses & worthwhile causes.
6 Europe booms
7 Pop Champagne corks
Yes!
It was a proposal for investing in social benefit that we put forward as a formal strategy plan. It was two years before the crisis and the QE response to it. Describing practical action rather than opinion,we were censored repeatedly, particulary by the Guardian’s editors.
http://www.p-ced.com/1/node/372
Edited or deleted for repetitious posting, which I admit I find a little annoying when I have no clue what your agenda is or why you make your claims
Richard,
Taken alongside your comments regarding the OECD, the actions of these organisations is simply breath taking.
As I understand it, these bodies operate at the behest of their constituent members. That would be the countries who are members. Why on earth can we, the citizenry, demand these bodies do our bidding in the manner that we call for?
In my lifetime there has never been a greater need for civil society to stand up and demand what we seek!
Are these bodies so beholden to big finance and neoliberal dogma that they can not see the simplicity and effectiveness of Green QE? If that is the case, it is time to clean house!!
The problem we face is the most massive capture of institutions
Some just think they’re doing the ‘right thing’ for their employers – but they just kid themselves because others are out there to exploit, without doubt, and they will use anyone e.g. Cato using Google
Sadly the answer to your question is “YES”
YES on both questions!
i find this consensus answer to be worriesome.