Money Times - January 26, 2015
Posted by Jill Kerby on January 26 2015 @ 09:00
DEPOSITORS LOSE, SHAREHOLDERS WIN? WELCOME TO THE GREAT QE EXPERIMENT
I’m writing this just after last week’s announcement that the European Central Bank will buy €60 billion worth of government bond holdings from European banks between now and September 2016.
That’s about €1.1 trillion of brand new money, printed from thin air and now sitting on the balance sheet of the ECB that it intends the beneficiary banks to lend out in order to kick-start the moribund, debt-ridden, ageing Eurozone economy back into life.
The idea behind all this lovely new paper and ink euro-denominated “capital” is that it will be borrowed (at very low interest rates) by people who want to create new businesses, by existing business people to expand their business and hire new workers and maybe to pay the existing ones more.
In turn, all this new activity will generate new tax to help indebted governments reduce their own debt and to cut back on all the extra unemployment and social welfare payments they’d had to pay out since the great economic crash of 2008.
At least that’s the plan, just like it was the plan Japan after its economy crashed in the early 90s and in the United States when it started its mass QE/moneyprinting in 2009 (about $2 trillion that ended last year) and the UK where about £800 billion has been printed in the last two years.
The results have been mixed with the US having the ‘best’ experience, mostly because of the success of oil and gas fracking which has helped lead to a resurgence in manufacturing. Official unemployment has fallen there, but the fewer people are employed in the US than in 2008 and wages, adjusted for inflation, are back at about 1989 rates.
What had been a clear consequence of all the US and UK money printing was a surge in some asset prices: stocks and shares, certain land/ property, art and precious metals. Even government bond prices and corporate debt. (Some think these are in bubble territory.)
In Japan, nearly two decades of the Bank of Japan first pushing interest rates down to zero and then buying its own bond issues with printed yen has been so unsuccessfully, that this year the government announced it would start directly buying Japanese stocks and shares to boost stock prices and put more yen directly into the hands of shareholders. This, they hope, will boost sales of Japanese goods and services and circulate the printed money that way.
So will QE actually work in Europea and kick start our domestic economies, create tens of thousands of new jobs, get prices and profits going up again (ie “good” inflation), and help reduce the cost of debt?
I don’t know, but neither does Mario Draghi. Neither of us have crystal balls.
But I’m going to take a guess and suggest that if the US or British experience is anything to go by, this c€1.1 trillion of new euro (remember this money hasn’t been earned in any productive manner; it isn’t a profit from the sale of a successful venture; it isn’t anyone’s hard-earned savings that has been taxed) could also drive up stock prices and other assets like property and fine art and precious metals.
It could also drive down European interest rates further, including government lending rates, making it easier for governments, corporations and individuals (if it trickles down that far) to service or pay off their debts.
Some commentators suggest that because the banks that have received cheap QE money in America and the UK didn’t lend it out to ordinary folk (who they feared still had too much debt and insufficient wages to repay the new loans) that maybe the ECB should just take a chance and just lend out this c€1.1 billion of new cash directly to us.
The debtors amongst us could use it to pay off their really expensive loans and the rest of us could start buying all the stuff we’ve avoided doing these past 6-7 years, thus ‘stimulating the economy’.
This is the road to hyper-inflation say the worried Germans – a lot of cheap credit/money chasing a limited amount of goods and services always drives up prices. But it would certainly be the more ‘honest’ way to distribute what is nothing more than government approved counterfeit funds.
So how should we play this great European QE experiment?
Judging from the QE experience so far, pension fund holders, could see a spike in their fund values. Ditto for some Euro stock holdings (or other shares if the €1.1 trillion is invested outside of the eurozone, as might happen.) If this money goes looking for other tangible investments like land/property, art and precious metals, the holders of those assets might see their (paper) wealth increase.
Since QE has resulted in even lower interest rates in other jurisdictions and the loss of spending power in the currency concerned, it could further punish European savers and anyone living on fixed incomes, like pensioners.
It certainly raises the risk stakes to another notch for savers and investors who need higher returns.
If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.