Perhaps you didn't hear about it, or if you did you dismissed it because of who said it, but I found some comments by Greece's finance minister over the weekend about the European Central Bank's quantitative easing bond buying program very insightful – and in synch with my own thoughts.
Speaking at the Ambrosetti Forum in Italy over the weekend, Yanis Vardoulakis warned that the ECB's purchases of sovereign bonds, which started last week, will create an unsustainable stock market bubble that is unlikely to boost private-sector investments in the euro zone.
"QE is all around us, and a great deal of optimism hangs on it," Varoufakis said in his speech, "Presenting an Agenda for Europe. "At the risk of sounding like a party pooper, let me say that I find it hard to imagine how the broadening of the monetary base in our fragmented, and fragmenting, monetary union will transform itself into a substantial increase in private investment in productive activity."
Instead, he said, "the result of this is going to be an equity run boost that will prove unsustainable."
Last week the ECB said it bought nearly €10 billion ($10.33 billion) of bonds in the first three days of its QE program, which began March 9. The plan calls for buying €60 billion of debt securities a month through September 2016.
Yields on German bunds, which account for the lion's share of the purchases owing to the country's status as the biggest economy in the eurozone, continued to fall to record lows. The yield on the benchmark 10-year bund ended the week at 0.22%. That’s down from about 1.93% at the beginning of 2014. Yields on comparable Italian and Spanish bonds both ended the week at 1.15%, nearly 100 basis points below comparable U.S. Treasurys. That's down from well over 4% at the beginning of 2014.
Meanwhile, euro zone equities continued to rally. Germany's DAX index jumped 2.5% on Monday, pushing it well over the 12000 mark, a new record high. The index has surged more than 40% just since the middle of October.
In addition to boosting stock and bond prices, the QE plan has succeeded admirably in driving down the value of the euro, one of its main goals. The currency ended last week at below $1.05, down 25% since last May and 16% over the past three months. It was worth $1.38 only last May.
All fine and dandy. But is QE really doing anything to boost the economy? ECB President Margi Draghi has already announced that it will, before the program even got started.
But we've already seen lots of QE bond buying in other countries over the past several years, and it's debatable whether they've done much to boost those economies. They have succeeded in creating asset bubbles in stocks and bonds, for sure, and made it cheaper for governments and blue-chip companies to borrow, meaning it's helped those the most who need it the least.
But can we truly say they've done much to boost private investment?
Vardoulakis doesn't think so, and neither do I.
"QE has indeed proven quite bad at this transformation even in solid, homogeneous economies like Japan, the U.S., and Britain," he said. It is bound to prove worse in a fragmented Eurozone where asset purchases by the ECB are not even proportional to output gaps or aimed at the national economies experiencing the most powerful deflationary forces. I very much fear that the decoupling of the monetary base from the money supply that is always QE's Achilles Heel will, in the case of the ECB's QE efforts, prove far worse than it did in the experience of Japan, the United States or Britain.
"The notion that this type of asset price inflation will help mobilize idle savings and convert them into productive investments, especially in the crisis countries, flies in the face both of empirical evidence from countries where QE was vigorously pursued previously and it flies in the face of basic macroeconomics," he said.
The Greek finance minister noted, as I did in a previous column, that the ECB is committed to buying more German bunds than the country is planning to even issue, driving long-term German bond yields to near zero. Does that make any sense? And how does that benefit the euro zone economy? How low do interest rates and the euro have to go before they create some benefit?
My point in this column isn't so much to publicize Vardoulakis's critique of the ECB's EQ program as it is to compare it to our own QE and low-rate policies orchestrated by the Fed. Have they actually done much to boost the U.S. economy, which is still limping along at about a 2% annual growth rate?
On Wednesday, the Fed will conclude its two-day FOMC meeting, after which it will tell us whether or not it will continue to be "patient" before it decides to raise interest rates off zero. Naturally enough, most investors want the Fed to continue to wait, since doing so allows the stock and bond bubble to continue to build. Of course, nobody wants the party to end, and the Fed is afraid to find out what the fallout to raising rates will be.
But if the Fed feels the need to remain patient and keep rates at zero, where they've been for more than seven years, for several more months, what does that say about the effectiveness of QE and other central bank stimulus measures?
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
2 thoughts on “Does QE Really Work?”
The elephant in the living room is idle cash. Stock repurchases that convert paper shuffling into "capital gains". Unless corporate funds are used for capex, its all just sound and fury, signifying nothing!
Increats invest in Greece country and increase salary of the people
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