Courtesy of Mish.
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. …
