Former Morgan Stanley Asia Chairman Stephen Roach doesn’t think much of the European Central Bank’s plan to start their own program of quantitative easing:
In the QE era, monetary policy has lost any semblance of discipline and coherence. As Draghi attempts to deliver on his nearly two-and-a-half-year-old commitment, the limits of his promise – like comparable assurances by the Fed and the BOJ – could become glaringly apparent. Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.
In his view European conditions don’t favor QE working very well for them and it hasn’t worked very well in the U. S. or Japan. Unless, that is, your operative definition of “working well” is making the ultra-rich a heckuva lot richer. Pumping up the stock market isn’t an unforeseen side effect of QE, it’s part of the basic mechanisms of the plan as Dr. Roach points out in his op-ed.
The ECB is trying to devalue by pumping out euros. They want American consumers to pull them out of the fire.
The alternative is what? Where no one is richer? I’m certainly not super rich but I definitely appreciate the tripling of net worth since 2009. I’m a “saver”, please keep punishing me.
The American consumers who are buying are buying stocks, multi-million dollar houses (both have seen substantial run-ups in prices), and Lamborghinis. Most will only buy so many Lamborghinis.
The alternative to pumping up financial assets is promoting economic growth the old fashioned way, via capital investment and sweat. You can’t do that through monetary policy, at least not monetary policy alone.
The American consumers who are buying are buying stocks, multi-million dollar houses (both have seen substantial run-ups in prices), and Lamborghinis. Most will only buy so many Lamborghinis.
You know that, but the ECB hasn’t yet figured it out. The most well-credentialed people in the world can also behave the most stupidly and that’s what we’re seeing. QE is pure desperation on their part; for four years a eurozone slump has defied their Ricardian reasoning, now they’re going Friedman a la helicopter drops.
The signs are all there. I just checked VW’s North American sales. The company isn’t making projections here and is struggling just to keep its sales up.
I have been through this with the US financial system and economy. They need the credit supply to expand, but the European financial system is far worse than the US financial system.
The EU and euro are headed for the rocks. It is becoming apparent to more and more people, but the ECB & EU leaders and bureaucrats are in too deep. Even if they wanted to see reality, they could not.
@Ben Wolf
I see you jumped in on @Dave Schuler’s OTB post about Greece. If you give me a mailing address, I will send a case of soap. Actually, I was surprised it has not devolved into a total food fight. Most of the idiots have dropped off, and there are a few who seem to be able to follow what you are saying.
I considered jumping in, but @humanoid.panda has done a good job. Your comments were good also, but for most of the people, you are just pissing in the wind. For them, that long comment could have been written in Sanskrit. For the record, I agree with a lot what you have written.
“You know that, but the ECB hasn’t yet figured it out. The most well-credentialed people in the world can also behave the most stupidly and that’s what we’re seeing.”
But surely they must, Ben. Just calling them stupid seems too easy. It has to be rooted in dogma, political water-boying or an alternative agenda. Even the old saw about how a carpenter only sees nails for his hammer is better than they are drooling monkeys.
I believe in alternative agendas, Drew. They know damned well what they’re doing & who it helps.
Guarneri,
It’s left-liberal European ideology. They can’t let go of the dream of a USE and will believe anything that offers the appearance of salvaging the project.
Tasty,
It all comes down to money. Banks can make it or government can, and we’re stuck with that whether we like it or not. People regardless of political persuasion are remarkably resitant to that idea.
“The alternative to pumping up financial assets is promoting economic growth the old fashioned way, via capital investment and sweat.”
Why do you think they must be mutually exclusive? Tight monetary policy tends to kill capital investment doesn’t it?
“You can’t do that through monetary policy, at least not monetary policy alone.”
No, but Central Banks aren’t the policy makers. It may simply be that in monetary policy the only choices are between QE and impoverish everyone – thus the blame should lie with policy makers and not QE. Certainly tight monetary policy is hurting reform efforts in Europe?
“They can’t let go of the dream of a USE and will believe anything that offers the appearance of salvaging the project.”
Yes, but they have real reasons to want to hang on to that dream. This is the part of the world that had two World Wars and where nationalism seems to hover way too near the surface for many of the countries in the EU. If the trade off for a bit worse economy is not killing each other it may be a good trade, but that is their decision to make not mine.
Steve
Certainly tight monetary policy is hurting reform efforts in Europe?
That is the conventional wisdom, yes. The unconventional take is that QE is more likely to exacerbate current difficulties while generating additional ones. I would suggest QE has significant potential to be deflationary rather than, as hoped, inflationary.
That was one of the few OTB threads that actually improved, thanks for the heads-up Tastybits. Ben, I am not sure I completely buy-into the degree to which this was a German design, but whether it was specifically intended or a natural consequence of those actions taken may not matter much.
I think that “design” is too strong a word and I suspect that Ben would agree. There is a prevalent economic policy in Germany. What we’re seeing across the eurozone is a foreseeable consequence of the policy. The Germans don’t see it way but viewed from outside it’s pretty obvious.
There is a school of thought which goes all the way back to Adam Smith that economic activity is a morality play and to some extent that’s right. However, the reality is that Germany can’t run a trade surplus with its neighbors without those neighbors borrowing. When the neighbor is undercapitalized and a low-trust society, as is typical of post-colonial societies, you get the problems you see in Greece. Keep in mind that Greece was a Turkish province for 350 years and treated pretty harshly.
To kvetch a little; I am beginning to tire of the EU to USA comparison that emphasizes the degree to which “rich” states like NY, subsidize “poor” states like MS. Certainly true, though I think the exact numbers are a bit more hypothetical. But increasingly there seems to be something very self-serving about these transfers, and probably not sufficient in explaining the differences btw/ the EU and the USA.
For one thing, a resident of MS can move to NY with relatively little inconvenience. They will still speak the same language, enjoy the same retirement benefits, and otherwise enjoy a set of nationalized rights enforced through the federal courts. I read somewhere that only about 10% of Greeks speak German, and there are probably a whole host of complications from moving from Greece to Germany. Would a graduate from a Greek university enjoy the same acceptance in Germany as a graduate from Ol’ Miss could find a job in NY? I don’t know, but even given an anti-Southern prejudice in the North, I think the acceptance would be greater simply because many college graduates don’t necessarily graduate from a college in the state in which they seek/obtain employment.
But largely I don’t give New Yorkers the satisfaction of believing they’ve supported policies that transfer money to Mississippi. They’ve advocated policies that seem just and sensible from their own experience and they consistently support them on a national scale because they believe themselves to be part of a nation. Germans are advocating policies as part of a German nation; I am not sure they are doing so to screw over the Greeks, they are simply not part of the considerations.
PD:
See my comment above which I think echoes some of what you’ve written in yours. The Germans have a lot of funny economic ideas. Economists believe things there that are pretty uncommon outside of Germany many of which, remarkably, are exculpatory of Germans.
It’s easy to over-estimate the degree to which New Yorkers are subsidizing Mississippi and the ROI of tax dollars to federal spending isn’t strictly a Red State/Blue State thing, either. The #1 state as of the most recent year for which this data was tabulated is New Mexico ($2.03 for each tax dollar). And New York and California aren’t getting the worst return, either. New Jersey is ($.50 for each tax dollar). As with most things Illinois gets a pretty short end of the stick: $.75 of spending for each dollar of taxes. That’s worse than either New York or California.
One of the issues with the calculation is that it doesn’t include a distribution of shared burden for things like defense or the court system.
@Dave, I had meant to follow-up one of your initial comments about Greeks being starved for capital with some further background. As I recall, the effect of Greece and other more peripheral countries to the monetary union was a fairly drastic drop in interest rates, which spurred investment in what would predictably result in a boom and bust cycle, and in Greece that appears to have meant tourism-related investment, which is so vulnerable to economic cycles and produces so much temporary and low-wage employment.
@Dave, I’ve always understood the EU project as largely motivated by balancing the U.S. I think my assumption is something that I developed in the 1980s, and may be quite dated. But just because this sort of impolite, competitive agenda isn’t frequently mentioned, cannot mean it’s not true. The fact that the U.S. has often supported the EU project is not necessarily contrary proof.
But from this assumption, it is easy to see how the differences within the EU can be brushed under the rug for the major power plays at work by the major players. “Greece should be grateful to be part of such a major economic player,” etc.
@Ben Wolf
Yes, fiat money and fractional reserve lending are not going away, but the partial gold standard and G-S were compromises that allowed it to exist without the financiers sucking straight from the government currency spigot.
I would prefer Cornelius Vanderbilt running a railroad empire than Jamie Dimon running a financial empire. One used real money to build real things. The other used “money” to create credit things.
We again differ on the term money. At the present time, dollars are no different than any other credit instrument. The money supply and the credit supply are really the same, and the credit supply includes everything under the surface and things not typically considered credit.
Increasing the amount of dollars or credit without increasing the value of the existing assets and/or adding additional real assets does not help, and it only worsens the situation. This was what created the bubble and financial crisis, and doing more is not going to fix it.
In a G-S world, Keynes and MMT solutions seem to work when the people in charge have a few brain cells. The best policy would be to have the money supply grow at the same rate as GDP (positive or negative), and it would need to slightly lag it. You could have your deficit and eat it to.
In the present world, we are running with all safety systems locked out. When the engine overheats, there is no way to stop it. It just keeps speeding up until it blows, and then, everybody says, “nobody could have seen it coming.”
I’ve written about this. I was living and working in Germany before the euro was adopted but was a very hot topic of discussion. The primary argument in favor of it was that it would serve as a “balance” with the US and balance is the polite word. “Attack vehicle” is closer to the mark (as it were).
In discussion at the time I always brought up the very scenario we’re seeing now and I was always pooh-poohed, the common reaction to dumb Yanks. What our European cousins do not seem to realize is that we have several hundred years more experience with a large free trade zone, common currency, mass immigration, and multi-culturalism than they do. In addition our government is older than most of theirs by at least a century. Britain is, of course, the exception.
On the OTB thread, @humanoid.panda brought the rich state / poor state, but he/she also used Nevada housing as another example. It was meant to illustrate a point, but it got hijacked for political reasons. That got straightened out, and the thread stayed on topic.
Also, @humanoid.panda pointed out how Greece would have benefited being on the drachma instead of the euro.
I would recommend a full reading of @humanoid.panda & @Ben Wolf at least, but you may end up with a lot more questions than answers.
Now that I think about it. There is a lot they are not including. They are familiar with the subject matter, and there are a lot of concepts packed into each sentence.
I think that if we take economic interaction between U.S. states to the level of real wealth, the “subsidy” meme becomes rather insubstantial. While New York may pay out more per capita in taxes than South Carolina, the latter is providing New York’s businesses with the demand New York itself can’t generate. New York provides MS with stuff, MS is providing New York with employment.
@Ben Wolf
The “providing employment” portion of the equation is what people do not understand. This is applicable in the Germany/Greece example, and I think you were trying to get this across at OTB. It is also applicable to the China/US relationship, and with the size of the US trade imbalance, there are few places for the dollar to go.
It would be similar for the drachmas that purchased German goods. Any drachmas not spent by Germans on Greek goods or services (vacations) would be stuffed into mattresses, or they would be invested in Greece.
It is likely that much of this investment would be in credit instruments to create consumer debt, and this consumer debt would be used to purchase German goods. Anybody notice anything similar?
GM did not start GMAC (financing) because they wanted to ensure consumers were getting treated fairly. GM wanted to ensure that car buyers could buy cars, and if they made a little something extra, all the better.
(Here and at OTB, a lot more people lurk without responding or mean girling (thumbs up/down), and many of them really appreciate the ink you spill. I do not agree with you a lot of the time, but you have spent a lot of time studying these issues. You are not spouting mindless politically oriented blather.)
Come for the blather, stay for the pie. We can only hope that sometimes people accidentally learn things. I attempt to avoid the blather and go straight to the policies. If I didn’t have the hope that in tiny, incremental ways I might be able to tell someone something they didn’t already know, I wouldn’t have this blog. Small steps.
At OTB, sometimes the same post topic comes three or four times a day. I have an RSS reader, and since it is web based, it is fairly current. It is hard enough to keep up with slight variations on a topic. You do this occasionally.
I try to keep up with the comments to learn. This is how I generate a lot of leads to begin tracking. The problem is the amount of crap that there is to wade through to find the nuggets. When somebody like @Ben Wolf responds to one of these idiots, I read his comment, but I feel like I need to take a bath afterwards.
I will open the comments for your posts and a few others, but most of them quickly devolve into nonsense.
I do like the email notification, but that probably keeps that idiots coming back. Over here, you really need to work if you want to stay in the conversation. I do appreciate your work.
Dave, I agree that my use of “design” wasn’t well thought out as ought to have been. I put up an additional comment fleshing that out a bit more.