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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.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
It is extremely difficult to understand how Europe believes that this plan will stimulate the economy. The bureaucracy, the unions, the employment conditions, the holidays and the retirement packages will gobble up this money so fast… Poor entrepreneur: He will not get his share and this is what will prevent Europe from improving its economy. Then, one day, Germany will see that a big mistake was made and that will be the end of the European community as we know it.
They don't believe it. This is just a way to reward the big money insiders and keep the banks afloat and cashed up. It's what central banks exist to do.
Europe has recovered from 2 World Wars in the last 100 years.
May be they know what they are doing.
No. They don't.
They will flood the banks with cash in the hopes that those banks will lend the money to people who want to start businesses, but nobody in Europe is foolish enough to start a business because of all of the rules. So the banks will loan the money to already over-indebted consumers to buy cars and houses, which they'll eventually default on, or the banks will buy assets, boosting prices and creating a wealth effect that only encourages more borrowing and more spending. But there will be no jobs, only higher prices and a lower standard of living for Europeans.
I can't tell if you're being serious or sarcastic. The fact that the continent allowed conditions to spiral out of control twice in a span of 20 years that resulted in many tens of MILLIONS of lives being lost sure speaks volumes about their "know[ing] what they are doing." These countries allowed treaty entanglements to start a World War that included trench warfare and gassing. Post WWI, Germany had an out of control central bank that caused rampant inflation during the Weimar Republic and then allowed Hitler to rise. Meanwhile, other countries ignored the threat and the world was plunged into another worse World War. The U.S. lent billions to the western European nations under the Marshall Plan which rebuilt these countries, which drove the recovery. So are you seriously contending that these countries know what they are doing?
Do the Europeans really believe that the idiots who got them into this debt, are the people to get them out of it ?
By printing more money ?
The lunatics are running the asylum
Truly !!
Mankind has always risen from diasasters and unfortunately forgotten to learn from the past history. So will Europe undergo its experiment with bundling of totally different entiities and mentalities under the €uro umbrella. It will lead to another disaster with unforseeable damage for the poor millions who will fnally have to pay the price at the toll plaza anyway as it has always happend in the past
Dudes, yo'all headin' the wrong direcshun! Putting people back to work at good wages should be the focus! The US system of hire, layoff, unemployment insurance has given me some rough years, a good career overall. Jes' don't mess with what I've earned–private pension, Social Security, Medicare.
Why does one want inflation? What's wrong with steady prices? Big projects at increased wages, driving up prices would be good. Hope Syriza can put Greeks back to work.
The Earth Motto:
Exlaxia Excrementia
If you gots the sh*ts, take another laxative…sooner or later you'll run out of sh*t. Problem solved.
IOW
If it has never worked, you just haven't done it hard enough.
First, It must be fixed beyond repair.
Ode Coyote
Can one really tear boards out of the hull to build enough buckets to bail out the boat?
So, let me get this straight – we print ever more money against no valued collateral as a way to get people to spend and banks to loan.
In essence, we roll out more valueless money to stimulate an economy already based on valueless money?
And it's been tried over and over, and it fails – but we're at the bottom with nothing else we CAN do?
Why don't we just have a Jubilee Year and start over?
So, why in the world would you omit that Japan instituted an increased sales tax at the same time as starting their QE???? That has had an enormous effect in deterring consumption!!!
One cannot expect a socialist solution to a capitalistic problem or the reverse. Life is performance based and quality cannot be legislated.
Very soon it's all going to implode for the global economy. Europe can only manage to stay afloat for a short time longer. Soon the Euro will be at parity with the U.S. Dollar and probably much lower until the euro cease to exist. Greece is a trigger brewing again. Other countries will follow. Deflation is going to be prevalent for a long time going forward and no economy can escape it. Only when new radical technologies are created and demographic models improve will the world economy recover again. And that may 10 years in the future. The U.S. Dollar reigns supreme now and will continue to reign supreme in the future. Sell stuff you really don't need, live modestly and save your cash – it's gonna get much uglier when the house of cards comes down "very soon".
So the US dollar reigns supreme ?
We are 17trillion in debt and printing ( digitizing ) money, with no collateral, and you think this can go on ?
Really ?
Japan never let the cartel-connected banks fail (sound familiar) and with no other alternatives being offered tried stimulus. The US had run out of options so we tried QE. The inflation fears have not materialized in reality. Europe is trying a stimulus plan as Keynes' theory suggests. Obviously the Austian approach failed.
What would you suggest we do? Easy to criticize but much harder to come up with a workable plan.
Everyone should remember the caveats embedded in the economic texts. First there is ceteris parebus (all other things being equal) They never are. And the effects are felt "at the Margins" and finally "In the long run". Take a deep breath and think about it.
We should all feel sorry for Europe, with its great history and culture. But they are all tied up in "Group Think"; trying to save a social, political and economic system that has just become to heavy to support. Until the power of the individual overcomes their believe in the power of the system, it will stagger and finally fall.
Why can't governments-Federal, state and local figure out that there is no free lunch? Not everyone can work for the government and get all of those great benefits that far outweigh their real value to the taxpayers. Eventually, the politicians will have to discover that there are only so many resources of the taxpayers that you can spend and borrow. It does not work indefinitely. Even Jefferson realized that government wastes at least 15% of its total budget just because it is government. Our current waste percentage must be near 40%. Why doesn't Europe see that their problems are with the government spending and that all QE does is postpone the inevitable? Bite the bullet and put into effect the structural reforms needed to make government work as a government (inefficient as that my be) and not as a source of payola for politicians to pay their constituents and themselves.
Hello Peter:
Thanks for the great article.
So what happens after the euro collapses ? Will all of the euro zone nations go back to their individual currencies like before ?