It would be a profound understatement to regard me as a Quantitative Easing sceptic. In my mind nothing is more absurd than Central Banks creating money out of thin air. In fact I think it is a sign of the times that this has become a contrarian view.
The ECB recently joined this cavalcade to the tune of €500bn. I suppose the pressure became unbearable given prevailing economic wisdom. A persistently anaemic economic growth environment recently exacerbated by threats of deflation did not help matters much.
My moral or logical misgivings notwithstanding, QE has yet to convince me of its effectiveness even as a policy instrument, not least its credentials as a facilitator of economic growth.
Some may point to the recovery of the US economy as evidence of QE’s capacity to drive output. I would encourage caution about rushing to such conclusions. After all correlation is hardly confirmation of causality.
Indeed, a counter argument could be advanced that an improving housing market and eased levels indebtedness have improved household balanced sheets, releasing more money to the American consumers. Who, as we know, have the reputation of needing little invitation to consume.
I am willing to entertain the plausibility of QE’s usefulness as bulwark against deflation but not much more. The inflated money supply certainly does lend itself to low interest rates, but that is hardly the medicine needed by the Eurozone at the moment, where interested rates have been hovering around record lows for years.
The root problem to me seems to be either the unwillingness or the inability of individuals to spend. Which, in turn, translates to the unwillingness or the inability of companies to invest in fixed capital formation. More so in a sluggish global economy. The problem can also be placed at the door of governments who are able but unwilling to do the same.
To all of these problems, QE hardly seems the solution. What it does is to pump money into the hands of wealthy individuals and institutions, the most likely holders of EU bonds, whose appetite for consumption and lending respectively is questionable at the moment.
What these parties are inclined to do is to pump money into asset markets such as shares and bonds or maybe property, whether in host countries or emerging markets. This precipitates frothy asset growth and deepened economic inequality.
If governments want to put money into the hands of households, the direct route of tax cuts seems the most logical approach. Why go through the banks, whose appetite for lending has shown itself to be so unreliable?
If there is a potential positive outcome that even a sceptic like myself would need to accept, even if ever so reluctantly, is the prospect of a weakened Euro. In a global environment dominated by artificially deflated currencies, monetary authorities that do not follow suite are subject to unfair competition as their currencies become comparatively expensive.
As we have begun to see, the Euro is flirting with record levels of weakness, which can only bode well for the ailing European economy. In a global economy characterised by such daunting threats as a slowing Chinese economy, it certainly can use every bit of help it can get.
