Monday, June 22, 2015

QE results in Europe and Japan will be similar to what happened in USA

In January the European Central Bank unveiled its long-awaited quantitative easing program, pledging to purchase a total of €1.1 trillion in securities through September 2016 at a pace of €60 billion per month. It could buy even more if inflation remains below 2%.

These asset purchases will push the ECB’s balance sheet a bit over the €3.1 trillion peak it hit in June 2012 at the end of its last round of easing, when it lent €1 trillion to 800 member banks, which used the money to buy their sovereign debt. Like all major central banks, the ECB wants 2% inflation as a cushion against deflation, which has plagued Japan for 20 years and virtually eliminated economic growth as consumers wait for still lower prices before buying.

To gauge the efficacy of European easing in spurring growth, look at the Fed’s adventures with QE in the U.S. In reaction to the Great Recession and global financial crisis, the Fed and all other major central banks chopped reference interest rates essentially to zero, but closely regulated banks didn’t want to lend and creditworthy borrowers didn’t need more money. So after bailing out Wall Street, starting in the fall of 2008, the Fed moved on to QE, ultimately buying more than $3.5 trillion in government and mortgage-backed securities when the program ended last October.

Those who sold securities to the Fed used the proceeds largely to buy stocks, which has pushed the S&P 500 up 211% from its March 2009 bottom. That helped household net worth rebound 51%, but real GDP has averaged only 2.2% annualized growth since the recovery started in mid-2009, about half the rate you’d expect after the deepest recession since the 1930s.

The problem is that stocks are predominantly owned by high-income folks, who don’t spend much more as their assets rise. The central bank is no doubt frustrated by QE’s lack of success, but monetary policy is a blunt instrument. The Fed can move interest rates and buy and sell securities. That’s it. In contrast, fiscal policy can pinpoint aid to the jobless by raising unemployment benefits.

The questionable outcome of the Fed’s experiment with QE suggests that the ECB’s efforts may do little to boost growth for the 19 countries in the euro zone. Japan may also see little benefit from QE, by which Prime Minister Abe, elected in December 2012, hopes to stimulate the economy. The program will continue until the inflation rate reaches the Bank of Japan’s 2% target. As with the Fed’s QE, the results so far are disappointing. Real GDP rose at a 3.9% annual rate in the last quarter, and all but 1.9% of that was due to inventory accumulation, which may spawn offsetting production cuts in the future.