December 13 – Financial Times (Chris Giles and Claire Jones): “When the European Central Bank switches off its money-printing press at the turn of this year and stops buying fresh assets, it will mark the end of a decade-long global experiment in how to stave off economic meltdowns. Quantitative easing, the policy that aims to boost spending and inflation by creating electronic money and pumping it into the economy by buying assets such as government bonds, is on the verge of becoming quantitative tightening. With the Federal Reserve slowly reducing its stocks of Treasuries, central banks are no longer in the buying business. Globally, only the Bank of Japan is left as a leading central bank that has not formally called time on expanding its stock of asset purchases. Arguments over how, or even if, the trillions spent by policymakers helped the global economy recover will rage for years to come. But as central banks step back, the initial view is that the purchases worked — whether through encouraging investors to hold more risky assets, easing constraints on borrowing, providing finance so governments could run larger budget deficits or just showing that central banks still had an answer to weak demand and low inflation.”
At this point, the prevailing view holds that QE “worked.” Moreover, central banks are seen ready and willing to call upon “money printing” operations as need. The great virtue of this policy course, many believe, is that there is essentially no limit to the scope and duration of “QE infinity.” The FT quoted Mario Draghi: “[QE] is permanent and may be usable in contingencies that the governing council will assess in its independence.” Melvyn Krauss, from the Hoover Institution, captured conventional thinking: “No one willingly walks into a room from which there is no exit. Because QE proved temporary, because it worked and because it has ended, it is likely to be used again.”
But what if faith in QE is woefully misguided? What if markets and policymakers alike come to appreciate that QE only masked underlying fragilities and delayed desperately needed structural reform? Worse yet, what if the reality is that QE exacerbated latent financial fragility – through more leverage, speculation, misperceptions and market distortions. And what about social and political instability? Surely, there’s growing recognition that a decade of monetary stimulus and resulting Bubbles have further redistributed wealth and worsened inequality.
It was a downbeat Mario Draghi Thursday discussing the end of the ECB’s QE program. Undoubtedly, he always anticipated concluding an unprecedented $2.6 TN ECB balance sheet expansion with the eurozone in an upbeat environment – with Europe’s markets and economies in a good place. They’re anything but.
December’s aggregate eurozone PMI index declined to 51.4, the lowest reading since February 2016. With chaotic riots, France’s industrial sector is now contracting (PMI below 50). Perhaps more troubling, France’s Services PMI sank five points to 49.6, the low going back to February 2016. Germany’s ZEW economic sentiment index collapsed 13 points in December to 45.3. This is down from 95 early in the year and the lowest reading since January 2015.
Yet Europe’s economy is a pillar of strength when compared to the frail political landscape. Surely QE proponents would have expected the printing of $2.6 TN of new “money” to have, at least for a period, worked to pacify the masses and temper political instability. Detractors of unsound money and Credit are anything but surprised by heightened instability throughout the eurozone, certainly including the heavyweight Italian, French and German economies. The euro is arguably more vulnerable today than back in 2012.
Proponents of central bank stimulus operations take a sanguine view. They note that the ECB joined the global QE party late (2014). Truth be told, the ECB and global central banks are a full decade into their exalted monetary experiment. Let’s not forget Draghi’s “whatever it takes,” along with the ECB’s 2012 “Outright Monetary Transactions” program (OMT). Then there was 2011’s “Long-term Refinancing operations (LTRO),” where the ECB lent $640 billion directly to eurozone banks (liquidity in many instances used to buy government bonds). And back in 2010, the ECB adopted their “Securities Market Program.” All told, the ECB’s balance sheet expanded from a pre-crisis $1.5 TN to almost $4.7 TN.