You may have heard the news, the European Central Bank have started up the printing press. They are soon to print upwards of €60 Billion a month. The crowds of economic pundits have collectively cheered. Europe stands to enjoy significant near term benefits, but at what cost?
They speak of lower government borrowing costs for new debt, by lowering funding costs and thus the hurdle that projects must meet to become viable. They believe our exchange rate will fall and our goods will be come cheaper abroad. Europoean products and services will be flying off the shelves, etc. Well, it is an absolute nonsense. Yes there will be short term benefits. Any time you give a liquidity jolt you temporarily relieve pressure. But the longer term risks are far far greater, now that the act of QE has been taken. Essentially the technocrats have short circuited the capitalist system which continuously prices risk based on perceived repayment risks and cost of funds. This is a road to ruin as returns become obscured by official and politically motivated credit flows.
They will argue that deflation is a threat and must be tackled early before it takes hold. This is a smoke screen. The deflation we are experiencing is spotty and multi faceted and is primarily being driven by lower oil prices which are a global phenomena, not a purely European one. Secondly oil prices have already begun to stabilise and if anything are likely to drift higher from here. Don’t get me wrong deflation is a vey dangerous condition and can lead to a vicious negative feedback vortex to a state of depression. But we are no where near that level of risk or type of deflation.
The thing is it is being sold as a low risk, one way bet. Worryingly there has been no talk of the actual cost or the ramifications of his new measure.
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So who pays? Someone has to, you can not just create money out of thin air. The answer is “we do, you and I”, in the form of a devalued currency, diminished savings and devaluing pensions.
The ECB was always going to to launch Quantitative Easing whether it wanted to our not. Once the Fed, BOJ, BOE launched their programs in 2008 it was only a matter of time. We are in a era of global competitive currency devaluation were desperate governments must devalue currencies in order to spur domestic growth by improving the value of exports.
The problem with QE or money printing is it is a like a Pandora’s box. Once it is opened it can never be put away again. There will, now, always be an easy way out of every economic issue. All interested parties will now be able to eye this short term financing tool as away of solving short term issues. The Euro will likely morph into the Lira over time.
QE is not actually the creation of money, not in real terms. What it is is the reallocation of the monetary pool from those that have a share to those that do not. All they have done is to devalue the Euro’s held by duplicating and allocating the new Euros to central banks. The Central Banks will in turn buy junk assets off commercial banks and government bonds all in return for cash.
The hope is that the banks will lend the new cash to businesses who will employ people and in doing so add productivity and value to the economy, increasing bank earnings and taxes and wealth.
But the banks will not do that. They will hold the money first to improve their capital ratio’s then they will invest in the the stock market via funds or other instruments.
The ECB also hope that the governments will have more money in the treasury and be able to tax less, but they wont, rather they will allocate to social partners such as Unions.
In short what we are seeing is the wholesale capture of the monetary system by special interests and the mass confiscation of wealth from pensioners and savers to governments and government proxies. I fear that we have just passed a monetary Rubicon that may eventually undermine the very basic social contract of our capitalist system: work hard and you will prosper.
It will take time for the effects of this to be felt but the gates have been well and truly opened and from now on we are only as strong as our weakest political masters at their weakest moment. Those actors will surely plunder this monetary tool.
This tragically could be the step that opens the gate to extreme political entities who can canvass on the widest remit and promise everything to everyone. Indeed the definition of “urgent need” will change by degrees over time, until it will take very little to invoke a new round of money printing.
You are witness to possibly the greatest economic slight of hand ever perpetuated on a people, when the long gaze of history looks at this decision, deflation fears will not be part of the final analysis, arrogance, stupidity and theft will be.
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