Courtesy of Mish.
In spite of the facts …
- That QE causes economic distortions that benefit the already wealthy at the expense of everything else
- That QE tends to create asset bubbles that eventually bust
- That printing has never in history permanently solved anything …
monetarist fools clamor for more of it.
ECB Really Must Act
Reuters writer Hugo Dixon says ECB Really Must Act on Deflation
In September, inflation was above 2 percent in only two of the euro zone’s 17 countries, the Netherlands and Estonia. It was negative in Greece, and in Latvia, which is to join the single currency in 2014.
A looser monetary policy might push inflation in other countries, such as Germany, above 2 percent. But this would be a good thing.
What then are the best tools for the ECB to use? Shaving another quarter of a percentage point off its main interest rate, to bring it down to 0.25 percent, is the obvious first step. But it won’t achieve much and, after that, the ECB will have exhausted its conventional arsenal.
Fortunately, the central bank has unconventional tools too. In Draghi’s words, “we have a vast array of instruments”. Two, in particular, come to mind.
The first is the so-called long-term refinancing operation. This involves lending cheap long-term money to banks. The ECB lent 1 trillion euros two years ago in this way, to keep the banks afloat. Much has been repaid. But given that the rest is due to be repaid in just over a year, it would make sense to launch a new operation to ensure banks don’t run out of cash.
A more dramatic instrument would be to initiate a programme of quantitative easing (QE). This would involve the ECB going into the market and buying up large quantities of government bonds, in the same way that the U.S. Federal Reserve and the Bank of England do.
Last year, the ECB promised to buy unlimited quantities of peripheral governments’ bonds in order to preserve the euro. But QE would be different. It would involve buying bonds issued by all governments, including Germany’s, and its aim would be to push euro-wide inflation up to its target.
There would be two other beneficial consequences: the euro would fall, boosting the zone’s competitiveness; and the anemic growth rate would pick up. QE would be a departure for the ECB. But now’s the time to embrace it.
“Ensure Banks Don’t Run Out Of Cash”…
