I received an interesting email today from Geopolitical Information Service (GIS) regarding statements made by Prince Michael of Liechtenstein on European QE by the ECB.
Let's compare and contrast what Prince Michael has to say with what economic writer Martin Wolf had to say, also from today.
QE a Sign of Helplessness, Will Not Reach Economy
Please consider European QE Funds Will Not Reach the Economy by Prince Michael of Liechtenstein.
The European Central Bank's decision to introduce a programme of Quantitative Easing (QE) is not a win-win situation but rather an expression of helplessness ... that politicians in European Union countries are not prepared to address the necessary reforms, writes Prince Michael of Liechtenstein.
Necessary basic reforms are crucial in Europe if it is to restore global competitiveness, increase productivity and get the unemployed back to work. This includes reducing the share of national and local government in the economy. This will reduce the overheads of the national economy and reduce the deficit. Deregulation of laws which are too stringent such as labour and competition law, would enhance activities and ease innovation and job creation.
The 2008-2009 banking crisis saw the US focus on re-establishing the equity basis of the banks to a level which allowed the banks to lend to business. Europe instead chose the path of stress tests. In a simplified way we can say that if a bank reduced its loan portfolio to business, instead of increasing its sound equity basis, it could also pass the stress test. It also means that banks are reluctant to lend more money to business. This prevents new money trickling into the economy.
Zero to negative interest rates are also destroying savings and reducing personal retirement provisions. Pensions have been hit hard. This situation has been exacerbated by the fact that government pension schemes are insufficiently financed.
The real problem with the QE programme of buying sovereign bonds is that it takes the pressure for reform off the politicians. The ECB has already helped several European governments buy time so they can carry out reforms. Most of them - and especially France - have failed to use this opportunity.
It seems unlikely that these irresponsible attitudes will change with QE.
It Won't Work, "But It's a Start"
In contrast, Financial Times writer Martin Wolf says "Nobody knows whether ECB's QE will work but it is a start at least."
Actually, I am quite certain it will not work, and is in fact exactly the wrong thing to do. But let's dig deeper into Martin Wolf's thesis as outlined in Draghi's Bold Promise to do What it Takes for as Long as it Takes.
Wolf: Pity Mario Draghi, president of the European Central Bank. He is seeking to lead the eurozone to monetary water. Unfortunately, the beast has many heads: some long for a drink; others insist a drink would be bad for all. Yet the ECB has to try. Letting deflation take hold would be far more dangerous.
Mish: There's that nonsense about price deflation once again. A complete deflation rebuttal is below.
Wolf: So the ECB has decided to purchase €60bn of assets a month until at least September 2016. Above all, the purchases will continue until the bank sees a "sustained adjustment" in the path of inflation consistent with its aim of achieving inflation rates "below, but close to, 2 per cent" over the medium term. ...This is akin to Mr Draghi's 2012 pledge to do "whatever it takes" to save the euro. This time the ECB says it will buy some €1tn of assets, which is 10 per cent of eurozone GDP and a similar proportion of gross public debt. Above all, it will keep going until it hits its target. ... The crucial point is that the ECB has set a benchmark against which cessation of the programme must now be justified.
Mish: The crucial point is the stupidity of it all. Interest rates close to zero% did not fix the problem, or cause inflation. How in hell will interest rates going a few basis point lower fix anything? Here's the deal: The ECB cannot fix eurozone structural problems. And there are numerous problems to be sure. Add Prince Michael of Liechtenstein to the small list of people who realize the complete foolishness of the ECB's action.
Wolf: Failure to achieve the ECB's objective would devastate its credibility.
Mish: Credibility? What credibility? Prepare to be devastated.
Wolf: The eurozone might soon find itself coping with populist governments of the left or right utterly opposed to the policies imposed upon them. That way surely lies a far bigger disaster.
Mish: Populist policies are on the way because political leaders would not make the necessary reforms nor write off debt that cannot possibly be paid back.
Wolf: Nobody knows whether this action will work. But at least it is a start.
Mish: Actually, no one can realistically "know" much of anything about the future except outside of basic mathematical truisms and the fact we will all eventually die. That said, we can be quite certain, the ECB's plan is indeed ridiculous as explained further below. Curiously, not even Wolf claims it will work. Yet, he calls it a "start". A start to what?
Wolf: That is far from a complete solution to the eurozone's woes. But it is a welcome effort to keep the eurozone show on the road.
Mish: What road is that? To Oblivion?
Eurozone Structural Problems
The problems in Europe are insurmountable, and well understood by many, but apparently not Wolf.
- No fiscal union
- Wildly differing social agendas of member states
- Wide variances in productivity
- Wage discrepancies
- Retirement benefit discrepancies
- One size fits all monetary policy
- To make treaty changes every eurozone country must agree
- Target2 imbalances
What the hell good would even €5 trillion in QE do to fix those?
What good would it do if the ECB bought every bond from every country and pushed rates to zero across the board? How would it fix any structural problem?
Michael Pettis, Steen Jakobsen, Prince Michael, Mervyn King, Mish vs. Wolf
Once again, and with reasonable logic instead of Wolf's unrealistic hope...
Mervyn King: More QE will not help the world.
Steen Jakobsen (Others): "Lower Interest Rates May Reduce Consumption." Michael Pettis at China Financial Markets and Lacy Hunt at Hoisington Management both agreed.
I wrote about Steen's theory in Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph, a rebuttal to Bloomberg author Barry Ritholtz, also in favor of massive QE.
Deflation Fighting Silliness
Let's once again review my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"
I also strongly suggest Wolf consider Deflationary Spiral Nonsense; Keynesian Theory vs. Practice; Eurozone Policymakers Concerned About Falling Prices.
For a third take on the insanity of fighting consumer price deflation, please see Deflation Bonanza! (And the Fool's Mission to Stop It).
Problem is Debt
The problem with the global economy in general is debt. You cannot cure a debt-deflation problem via attempts to force more debt into the system. It is axiomatic the cure cannot be the same as the disease.
I have emailed Wolf before but he does not have the courtesy to respond no matter how politely I express things.
I will email Wolf again but do not expect a reply. At any rate, I am pleased to see the list of people willing to speak out on the ridiculousness of QE is growing in unexpected places.