QE – a solution looking for a problem

Stagecoach to Lordsburgh and the last chance saloon – which was posted here in September 2012 is relevant.

Quantitative Easing has mutated since in was devised and named by Professor Richard Werner when he was in Japan in the 1990s. Intended for use by private financial institutions and to resolve the difficulty of liquidity, it was adopted by the Japanese Government as an endorsement of their policies to deal with a stagnating economy. It has been a failure and they are now in the third decade of trying to stimulate a recovery. In January the Bank of Japan [BoJ] slashed its inflation outlook as plunging oil prices dented efforts to stay years of deflation. For a country that needs to import oil, and reduce nuclear generated electricity production, low oil prices should be good news. Only in a distorted and dysfunctional market economy could this bonus be perceived as damaging. Despite this the policymakers boosted their growth forecasts and said the Japanese economy was rebounding.

In February it was reported that the BoJ had held off launching fresh stimulus, even as weak growth figures aggravated concerns about the strength of the recovery in the world’s number three economy. The policymakers said Japan was seeing a moderate recovery trend, but they further cut back on their inflation expectations in a sign that the BoJ’s price targets look increasingly out of reach. Official data showed that Japan’s economy limped out of recession in Quarter Four 2014 with a weaker than expected 0.6% expansion.  This followed two consecutive Quarters of contraction that came as last April’s sales tax rise hammered consumer spending.  Preliminary data showed zero growth for 2014 compared with 1.6% in 2013.  BoJ confirmed inflation – excluding the effects of the tax hikes – was hovering around 0.5%.  The price downgrade indicates that their inflation target of 2% for 2016 appears unlikely and raises the expectation of further monetary expansion, that is QE.

This month is was confirmed that Japan’s recovery from recession was much weaker than first thought after the latest figures revised down the level of business investment in Quarter Four.  This joins a mixed batch of indicators that underscores a fragile recovery from recession, with further QE sooner rather than later in the year.  Japan was first to get on this track in what is turning out to be a never-ending journey.

The clue as to why Japan’s economy has not been derailed lies in the attitude and behaviour of the Japanese people.  Japan has a very cohesive society with high standards of conduct, and honour is paramount.  Failure to maintain the accepted standards is a disgrace that requires a public and grovelling apology.  This applies as much to the chief executive of a corporation as the chief ministers of the government.  During the growth period following WW2 the national debt was owned by the people who purchased their own government’s bonds.  This was positive as it kept the debt within the family and provided protection from the bond market and external forces.  With a loss of confidence this is less so now.

The UK has followed the same route, with the same consequences and the prospect of an equally long and never-ending journey.  The G7 countries have acted in concert, initially urged on by Gordon Brown who claimed to have saved the world economy.  The present Labour shadow cabinet were all part of his team and responsible for mishandling the financial crisis in 2008.  Instead of making public and grovelling apologies they have tried to reinvent themselves and have the affront to present themselves before the voters as a credible government.  The big lie is that they were not responsible for the world crisis and recession.  They were because they influenced the direction taken by the G7.  Their plan was, and still is, to increase the burden of debt.  Under their economic model there can be no economic growth without debt and inflation.

Last month Sweden cut its key interest rate to -0.1% and started QE.  As we reported in September 2012,  Sweden’s central bank – Riksbank, the oldest central bank in the world –  was the first to introduce negative interest rates in 2009.  The Riksbank are prepared to cut interest rates further and are very clear that they will do more if this cut does not work.  They will make monetary policy even more expansionary if needed.  The bank said it expected the global economic recovery to continue but at a slow rate.  However, Sweden’s economy is expected to have grown by more than 2% last year.  So what is the problem that QE is intended to solve?  The Riksbank said that there was a risk that inflation would not rise fast enough.  Prices had risen in only one of the previous twelve months.  The annual inflation rate in January stood at -0.3%.  It  launched the programme of QE by buying government bonds worth 10 billion krona to inject cash into the economy.

The Swedish krona fell to its lowest level since 2010 as a result.  Contrary to the situation in Japan, the Riksbank said that it would benefit from low oil prices, a weaker krona and low interest rates.  Denmark  has also resorted to negative interest rates.  While Denmark is not part of the Euro zone, it has tried to maintain its exchange rate with the Euro and come under pressure as a result, similar to the Swiss experience, which also introduced a negative interest rate.

QE is now being used as a solution for a myriad of problems, when it was originally supposed to deal with the credit crunch and the lack of monetary liquidity.  As a panicked participant at the 2009 World Economic Forum said, “We don’t know what to do; only that we need to do something and we need to do it fast”.  That something turned out to be QE.  The central banks needed to be seen to be doing something, even if it didn’t really address the problem faced by their own country.  It should be remembered that QE – the ‘printing!’ of new money to purchase treasury bonds – is a last desperate measure when all the other tools in the central banks’ tool boxes have failed.  There is a body of opinion that advocates the abolition of central banks as they are the root cause of the problem.  It is contended that only governments should create money, which should be strictly controlled, with commercial banks having their licence to print money revoked.

As previously stated, QE has mutated. The QE programme announced by the European Central Bank in January differs from other QE programmes.  This may not be a surprise given that the Euro is not a sovereign currency.  The plan is to inject 1.1 trillion Euro into the Euro zone economy over 19 months, starting this month.  It is controversial and has been fiercely resisted by Germany on the grounds it breaches the rules governing the Euro.  To accommodate this opposition the ECB will only undertake 20% of the asset purchase with the remaining 80% to be purchased by national central banks.  The first tranche included bonds from at least five countries – Belgium, France, Germany, Italy and Spain – with flexibility on what maturity of bonds will be bought; and with acquisitions of asset-backed securities and agency debt also included in the plan.  The Euro QE is straying into new territory and looks to be really messy.

How much longer can this go on?  The US started QE in 2008, to be followed by the UK in March 2009.  There is no end in sight, and there is no evidence that it is really working.  It has fuelled speculation on the basis that the asset purchase will create a scarcity of government bonds among buyers of the securities.  However, this is negated when national treasuries create and sell new bonds.  For example, in this months UK Budget there are proposals to borrow £140 billion in the next financial year.

We are told that this is how a modern economy works.  Debt, inflation, boom and bust are all part of this economic model.  The fact that the model keeps breaking down should lead any sane person to ask whether there is a better alternative.  Real growth is generated by an increasing population.  Population control leads to a declining population and less growth.  This is an important factor in the stagnation of the Japanese economy, and one which affects all of us and our future prosperity.




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