Economists across the globe anxiously tuned to the tiny hamlet of Kansas City for an important seminar regarding the European Central Bank (ECB). One of the major sentiments the President of the ECB, Mario Draghi, echoed in his speech to investors and economic analysts the past week was to talk openly about the issue of the continuation of current monetary policies and the looming threat of protectionism.
However, what was most concerning in this meeting was, as Bloomberg reporter Kathleen Hays reported, a lack of “concern regarding the Euro”. It seemed that Draghi had either not mentioned currency simply due to his inability to judge the strength of the Euro in a precise manner, or has decided to postpone the addressing of this issue for the next ECB General Council meeting, which is scheduled for 9th September, 2017. Such a difference in timing, however, may prove to be an issue for the ECB as it wrestles with the dynamic of the Euro by the end of the fiscal year. This, however, seems to be only one of many issues facing the central bank as it struggles to decide the next steps for its interventionist policies. One of the foremost issues facing the ECB at the current moment is the policy of “Quantitative Easing” (QE). Quantitative Easing, according to The Economist, is defined as “central banks creat(ing) money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence "quantitative" easing.” Quantitative Easing occurs when a central bank invests in government and public securities for the primary purpose of raising stock prices and lowering interest rates by encouraging privatized banks to give out loans with more ease. The ECB had carried out this plan in March of 2017, with the ultimate goal of continuing the fiscal policy until the General Council renders the act redundant. According to Bloomberg economist Daniel Moss, however, it seems that the European economy has seen nothing from strength to strength, as the overall gross domestic product of ECB member states saw an average of a 0.6% increase during the time of the QE’s headway near the end of the year. The growth occurred in the same span of time that the ECB cut back spending costs from approximately €80 billion to €60 billion. Thus, as Moss articulates later on, the ECB would be wise in scaling back their QE spending from approximately €60 billion to €30 billion near the end of the fourth quarter. As a result, there would not be a complete rollback of the QE policy, but rather a de-escalation of spending in the market. This would not only prevent further interventionism of the central bank, but would allow the free-market to regain lost ground in securities that would hitherto be in possession of the ECB. This interventionism, however, has the impetus of causing another major disaster as well. As much as people tout Quantitative Easing as a method of increasing economic activity, it seems to have the same issue of driving up interest rates. As reported by the Economist, “(S)ome worry that the flood of cash has encouraged reckless financial behaviour and directed a firehose of money to emerging economies that cannot manage the cash. Others fear that when central banks sell the assets they have accumulated, interest rates will soar, choking off the recovery.” Note that while the ECB is currently in recovery, it very well may cause a stagnation in inflation (termed by famed economist Milton Friedman as the commonly known portmanteau stagflation) and on the other spectrum, a lurching rise in interest rates. In the realm of currency manipulation, the issue arises when economists speak of ‘core inflation’ with regards to volatile goods. Volatile goods are defined as comestibles or gasoline; where the volatility of an item is judged in terms of the “measure of risk based on the standard deviation of the asset return”. In short, volatility can be ranked on an index from 1-9, with gasoline and food ranging anywhere from 7-9, which is considered very high risk. These high risk goods can be dangerous when subject to even higher interest rates, as those assets tend to dry up due to increased financial pressure, thus leading to the scarcity of the millennial favorite’s avocado toast and gasoline; an effect which inevitably raises prices on such goods. As Tim Worstall of Forbes reported, the so-called Core Inflation rose from 1.2% to 1.3% in the span of mere weeks, which is concerning taking into consideration the previously mentioned risk volatile goods have in the market. One of the more concerning issues for some ECB member states may, in fact, have more in effect with the domestic assets of those nations and its relationship with the ECB than any other. Democratic Socialist states are especially at risk from the ECB’s continuing policies. Under current ECB Quantitative Easing policies, banks with proportionally greater assets in the market are able to flexibly loan out more on the private scale. This, however, has had a major impact on household debt levels of nations that institutionalize demand-side economic policies. The OECD reported that three of the top five nations with the highest levels of household debt were ECB member states: Denmark (1.), the Netherlands (2.) and Ireland (5.). Nations like Denmark and the Netherlands have, on average, nearly 284% of household debt per income. This is due to a variety of factors, from high taxation to tariffs on foreign goods. These issues, however, play an important role in driving individuals to seek methods of paying their mortgages and exorbitantly high taxes through borrowing and loan-taking. This can have an adverse effect of pushing consumer reliance on long term loans, which if the ECB continues to raise interest rates, would begin deflating the asset bubbles present in nations which depend on ECB monetary policies. The quandary reaches its peak when the ECB decides whether to continue the Quantitative Easing; at the cost of deflating the Euro against the dollar (an effect of the Federal Reserve concurrently inflating the dollar’s value). As was reported by the Economist in the spring quarter of 2016, the appreciation of the dollar’s value by the Fed during that time caused a rift in international interest rates, an effect that could spell disaster in the near future if the ECB doesn’t take proper precautions in tapering. Only time will tell, however, once Draghi appears to address the General Council in Frankfurt in the next major press release for the ECB.
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By Galib KabirGalib is a longtime writer and contributor to the Hallway Herald, and our live-in economic policy advisor. ArchivesCategories |