Thursday, 22 January 2015


The ECB today, as expected, has engaged in a policy of open QE.  It is to buy €60bn of government bonds, every month, at least until September 2016, and with an open ended commitment to keep buying until the inflation path signals that it is back on course to meet the its target of 2% p.a. The ECB has, until now, engaged in only covert QE, via its policies of Long Term Refinancing Operations to banks, and Open Market Transactions. The initial consequence of the announcement was to cause the Euro to drop by around 1% against both sterling and the dollar.

This immediate effect of a falling value of the Euro, is probably the only real beneficial effect that Eurozone economies will experience from the move.  Bond yields in Europe, as elsewhere, are at several century lows. The cause of those low global interest rates is the huge rise in global rates and masses of profits over the last 30 years, which has led to a huge surplus of supply of loanable money-capital over its demand. Even if printing more money tokens were a means of reducing these interest rates – and it isn't, because as Marx sets out, it is only a means of devaluing the money tokens themselves – it is impossible to see how reducing interest rates, even further, from levels they have not been at since the time of the Black Death, would have any significant effect on stimulating economic activity!

A falling value of the Euro, does have some beneficial economic effects for Eurozone economies, because it makes the price of commodities, produced within the zone, cheaper, when priced in Sterling, Dollars, Swiss Francs, Danish Krona and so on. That means its easier to sell those commodities on the global market. However, the majority of commodities, produced by those countries, within the Eurozone, experiencing problems, are not sold on the global market, but sold to other Eurozone economies, such as Germany. Germany, as a major producer of high value commodities, and the world's second largest exporter, after China, benefits greatly from a reduction in the value of the Euro, because it means that its exports of Mercedes, Porsches and so on, become much more competitive.

But, for countries like Greece and Spain, or Italy, or Portugal, that rely on selling lots of lower value commodities, such as agricultural produce, to Germany, in exchange for these higher value commodities, there is no such benefit, because they are selling goods priced in Euros to Germany, which supplies them with these other commodities equally priced in Euros. Where Germany benefits from having lower priced commodities sold into the world market, as a result of a lower valued Euro, the peripheral economies have no such advantage in selling to Germany, or other northern Eurozone economies. The only way their commodities can become cheaper, in Euro terms, to sell into these northern Eurozone economies, is if their Euro denominated price falls. In other words, if they cut costs further, which means reducing the wages paid to workers in Spain, Portugal, Greece and so on, and indeed reducing the profits of capital in those economies further. It requires, further deflation in those economies, and a transfer of value to Germany and other northern European economies. It requires that an hour of labour-time expended in the periphery becomes worth even less than it currently is, compared to an hour of labour-time expended in Germany.

This has been seen in the past. Britain and other Colonial Empires pulled off this trick in transferring value from their colonies to the home country; the northern industrial states of the US pulled it off, after the Civil War, in relation to the southern Confederate states, and as Lenin points out, Russia pulled it off in relation to Siberia, and other outlying areas, in its own development during the late 19th Century. It is the kind of economic policy you would expect of a colonial power, not the kind of economic policy you would expect from a proto state that claims to be working towards a common market, and closer monetary and fiscal integration, with the concomitant sharing of risks and burdens.

And, the other aspect of the ECB decision demonstrates this further. It had been widely rumoured that the ECB would abandon the idea of risk sharing that is fundamental to such a monetary union, in the process of money printing, and the buying of sovereign bond buying. The reason for that is that the central bank has no resources of its own. Ultimately, the central bank only has resources to the extent that a sovereign state stands behind it, with fiscal powers to raise taxes, and cover any losses made by the central bank in such operation. In other words, under such conditions, monetary policy necessarily flows over into fiscal policy. If the central bank loses money, the state must levy taxes to raise the funds required to cover those losses. This is clearly a problem for the EU, where no such single state exists. In reality, the only state that exists with the power and credibility to perform this function, is the German state, which understandably is reluctant to accept that role, without control over the spending and borrowing.

Had the ECB gone for the idea that was touted that any bond buying would have to be done by, or covered by, the central bank of the country whose bonds were bought, that would effectively have spelled the end of the Eurozone itself. In the end, the ECB went only 80% in that direction. The central banks of each country are to stand behind the buying of bonds in their particular country, whilst 20% of the bond buying will be done on the basis of risk sharing by all Eurozone banks. That in itself assumes that these banks are able to cover this risk.

According to the ECB and others, the Eurozone banks are now in such a position, but anyone who has witnessed the repeated sham bank stress tests must seriously doubt the veracity of that claim. Time and again, we have been told that the banks were safe only to find, a few months later, those very same banks were bankrupt, and requiring bail-outs. In fact, nothing fundamental has changed to alter the solvency of the banks, and its for that reason that the ECB needs to undertake QE now.

The first examples of QE, undertaken in the US, were used precisely to print money to cover the huge debts of the banks and financial institutions which erupted in the financial crisis that began with the collapse of Lehman's in September 2008, and which I had predicted was about to happen several weeks earlier, at the start of July. What that amounted to, as I had written about for some time previous to that, was a policy of Socialism for the Rich, whereby the bankrupt assets of the rich were bought up at inflated prices by the state, and which workers thereby had to pay for in higher taxes.

When property prices fell by 20% in 2008/9 in Britain, as a result of the financial crisis, the British state undertook a similar policy, and in 2010, the state in Ireland, Spain, and elsewhere in the Eurozone, undertook the same course of action. The Irish state effectively bankrupted itself, buying up the worthless assets of the Irish banks, that rested upon masses of worthless Irish properties. The ECB policy, since 2010, has been a continuation of that policy. It has been a policy of continuous extend and pretend, whereby the owners – be they private owners or banks - of worthless European properties, in Spain, Portugal, Italy and so on, across Europe, have been able to continue to pretend that they still have some value, only because the banks have been able to avoid foreclosing on private borrowers, whilst millions of properties that have been repossessed, and sit on the books of the banks, continue to be shown at massively inflated values relative to their actual valuation, only because the banks themselves have been able to borrow at near zero rates, from the ECB, so as to avoid having to sell those properties themselves, at firesale prices.

Huge amounts of money has gone simply into keeping these fictitiouscapital values inflated, at the expense of investment in building real productive-capital, a process that has itself been frustrated by the maintenance of these massively inflated prices for fictitious capital, that has encouraged financial speculation at the expense of productive investment. The ECB's action, today, merely represents a further extension of that policy, to protect the fictitious capital of the super rich, and of the banks themselves, at the expense of building real productive-capital; at the expense both of industrial capital, and of workers who will ultimately foot the tax bill for this huge waste of financial resources.

A visitor from Mars would think that the people of Earth were truly mad to be trying to protect the fictitious valuation of paper assets such as shares, bonds, and mortgages, by cutting back investment in real wealth producing assets, such as economic infrastructure, education and so on, at a time when the interest rate, the cost of such investment was near zero! But, that is the cost that the owners of the fictitious capital demand.

For 6 years now, central banks have reduced official interest rates, to protect the nominal paper values of those fictitious assets. Not one additional machine, or piece of productive-capital can be shown to have arisen from it. The only place where real productive-investment and a growth of the economy can be shown to have arisen, where such policies have been undertaken, is in the US. But, there the real reason for that investment and growth lies not with the QE, but with the fiscal stimulus provided by the state to finance such investment. Whenever, the US state's policy of fiscal expansion was put under threat, by the Tea Party and Republicans, that additional investment and economic growth itself was reduced, as happened over the various crises around the Debt Ceiling, the Budget, and the Sequester.

Such growth was also seen in the UK and the EU, when such fiscal stimulus was undertaken prior to 2010.  But, similarly, after 2010, when conservative governments introduced austerity, it collapsed. However, much the British Liberal-Tories crow today, the fact is that the UK economy still has not recovered even the potential growth it lost due to their austerity policies since 2010, let alone the growth lost as a result of the 2008/9 financial crisis.

The ECB policy of QE will have no more success, without the kind of co-ordinated EU wide fiscal stimulus that has been undertaken in the US, and the fact that even Eurozone wide risk sharing of the QE has now been reduced to just 20%, says that is not likely to happen, in the near future, unless a new crisis forces it upon EU leaders. The only effect of today's announcement will be to assist German exports, and to undermine the position of the UK even further, as the Euro price of its exports becomes much more expensive, and so makes exporting to its major market that much more difficult.

The other effect has already been seen, prior to the announcement. It meant that the Swiss National Bank had to abandon its currency peg, causing the value of the Franc to rise by 25%. Now Denmark is in the same position, trying to limit the rise in the value of the Krona against the Euro. It will be followed by Norway, and other small states, currently outside the security of the Eurozone. The effect on financial markets, from the actions of the SNB, was rapid.  The effects on financial markets, as these other volleys fire, is likely to be even greater and more unpredictable. A number of small countries, ashas been set out previously, are at risk, because their banking sectors are many times the size of the country's GDP.

As with the effects on other countries across the globe, which have experienced rapid currency variations, as a result of QE and its removal by the US, and which have seen their inflation rates, and their interest rates move by similarly large and unpredictable amounts, the effects of QE by the ECB are likely to be more negative than positive. The SNB action showed that, despite what the media would have us believe, the central planners, in the central banks, are not Gods. In fact, they are more like would be Pinball Wizards, blindly flailing away at the flippers in the hope to send the ball off to hit the jackpot, but in reality with no idea where it is going to end up, or what richoches it might cause.

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