February 6th, 2015
in Op Ed
by Peter Krauth, Money Morning
Last week, the European Central Bank's turn finally came to announce large-scale quantitative easing.
As the continent witnesses a battle between deflation and attempts at inflation, will it finally be enough?
Europe is following in the footsteps of the United States, hoping for similar "successful" results.
Instead, it's likely to fall somewhere between the U.S. and Japan.
From the Land of the Rising Sun there is precedent, but it's a forewarning.
Here's the story....
Eurozone Quantitative Easing Plans Become Clear
Despite screaming objections from Germany, it seems Draghi is finally getting his way, which is precisely what I anticipated when I wrote about it earlier this month.
Here's what Europe's QE will look like:
- Monthly bond purchases of 60 billion euros starting in March.
- 20% of purchases by ECB, the balance by national central banks.
- Funds will mean cheap loans to banks in hopes that they will lend to stimulate the economy.
- Purchases will continue until at least September 2016.
- They will continue until the Governing Council sees sustained indication of inflation approaching 2%.
- ECB will cut interest rates on loans to commercial banks if they commit to in turn lend to companies or individuals.
To be sure, the ECB isn't quite there yet. It must first publish a legal document outlining its basis, which could face a court challenge.
Unfortunately, the green flag for QE came from the European Court of Justice, which essentially overruled Germany's high court, even suggesting Germany must abide by the decision.
German Chancellor Angela Merkel, always the eventual peacemaker, said any QE program by the ECB shouldn't be an excuse to avoid fiscal and competitive structural economic reforms. Her concern is spendthrift EU members might take QE as a signal that restructuring is unnecessary and go straight back to the fiscal punch bowl.
A top ECB official questions the program's likely effectiveness. Sabine Lautenschläger, a German jurist and a member of the ECB's Executive Board, thinks banks already have enough cash but aren't lending for fear a weak economy will lead to bad loans.
Across the Atlantic, Yellen Hasn't Learned from History
As for the Fed, whose QE program has ended (at least for now), the next question appears instead to be when will Janet Yellen start to raise rates?
I say not so fast.
The Fed knows the current bull market in stocks is long in the tooth, and therefore loathes doing anything to either trigger or exacerbate market weakness, or even the anticipation of it.
Neither is there any shortage of economic "luminaries" weighing in to this debate. Former U.S. Treasury Secretary Larry Summers warned delegates at the World Economic Forum in Davos that:
"Deflation and secular stagnation are the threats of our time. The risks are enormously asymmetric. There is no confident basis for tightening. The Fed should not be fighting against inflation until it sees the whites of its eyes. That is a long way off."
With rates already ultra-low, the U.S. has nothing left to cut when the next recession comes.
That would only leave a new potential round of QE. I'm just putting it out there.
What's more, IMF head Christine Lagarde has been doing her best to keep the monetary printing presses greased. The IMF recently lowered its 2015 economic growth forecast, calling for governments and their central banks to favor accommodative monetary policies.
Sadly, this is just the same movie with one screening too many...
Japan Tried Quantitative Easing Already... and Failed
Europe's new QE program perpetuates the currency war against another economic giant: Japan.
Responding to the news, Bank of Japan Governor Haruhiko Kuroda put his positive spin on, indicating the move would rid the currency zone of deflation and boost growth, which would in turn help Japan's exports.
He only wishes...
Japan knows a lot about QE, but apparently not enough. In fact, the term was coined for its attempts to kick-start growth and to get prices to trend upwards in search of inflation. That started back in 2001 and lasted five years.
It was a complete failure, but that never stopped the U.S., U.K., Japan (again), and now Europe from trying this tactic over and over.
Ever anxious to print, Japan's central planners began their most recent program in April 2013 under "Abenomics" the name applied to the economic policies of Shinzō Abe, Japan's Prime Minister.
Despite the $1.4 trillion package, inflation has floundered along with consumer spending.
The problem, of course, was one of size. So last October, the Bank of Japan took it up a notch just as the Fed was ending its own QE.
Cheaper oil has certainly not helped Japan's goal of reigniting inflation, with the Bank of Japan conceding it may take longer than forecast. That's a given.
Japan won't be the exception.
The ECB Is Wading Chest-Deep into Disaster
Europe's heavy regulatory environment dampens any potential stimulus effects from QE.
Employers face all manner of laws that require them to pay rich benefits and impede firing as business slows. That makes them especially reticent when contemplating expanding their business and hiring new workers.
Pro-business changes need to be made, such as a fundamental, structural reform of high benefits and hurdles to staff reductions when the economy stagnates.
Therefore, as Michel Martinez of French bank Société Générale adroitly estimates
"...ECB QE could be five times less efficient than in the U.S."
What's Martinez's unfortunate solution?
Hold your nose: even more QE!
"The potential amount of QE needed is 2 to 3 trillion euros! Hence for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is 2 to 3 trillion euros, not a mere 1 trillion."
Martinez goes on to suggest that such an expansion would likely prompt the ECB to
"...ease some conditions on its bond purchases (liquidity rules, quality...) or contemplate other asset classes - equity stocks, real estate investment trusts (REITs), exchange-traded funds (ETFs)..."
as the Bank of Japan had, previously.
No wonder Germany's terrified at the prospects, given its still-vivid memories of 1920's hyperinflation that saw 50 million mark banknotes issued.
With the ink barely dry on the QE press release, ECB Executive Board member and head of market operations Benoît Cœuré said:
"If we haven't achieved what we want to achieve, then we'll have to do more, or we have to do it for longer."
As no one seems to learn from the Japanese experience or from Germany's, is there any wonder why the Germans are paranoid?
Increasingly, it seems, central banks don't impact the market, they are the market. And that is a recipe for repeated disaster.