You may have heard the news, the European Central Bank have started up the printing press. They are soon to print upwards of €60 Billion a month. The crowds of economic pundits have collectively cheered. Europe stands to enjoy significant near term benefits, but at what cost?
They speak of lower government borrowing costs for new debt, by lowering funding costs and thus the hurdle that projects must meet to become viable. They believe our exchange rate will fall and our goods will be come cheaper abroad. Europoean products and services will be flying off the shelves, etc. Well, it is an absolute nonsense. Yes there will be short term benefits. Any time you give a liquidity jolt you temporarily relieve pressure. But the longer term risks are far far greater, now that the act of QE has been taken. Essentially the technocrats have short circuited the capitalist system which continuously prices risk based on perceived repayment risks and cost of funds. This is a road to ruin as returns become obscured by official and politically motivated credit flows.
They will argue that deflation is a threat and must be tackled early before it takes hold. This is a smoke screen. The deflation we are experiencing is spotty and multi faceted and is primarily being driven by lower oil prices which are a global phenomena, not a purely European one. Secondly oil prices have already begun to stabilise and if anything are likely to drift higher from here. Don’t get me wrong deflation is a vey dangerous condition and can lead to a vicious negative feedback vortex to a state of depression. But we are no where near that level of risk or type of deflation.
The thing is it is being sold as a low risk, one way bet. Worryingly there has been no talk of the actual cost or the ramifications of his new measure.
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