The European Central Bank has launched its QE programme, which is planned to print €1.1 trillion (that’s €1,100,000,000,000) of money in the Eurozone over the next two years.
Let’s put this number in context. The EU tax gap – that is money unpaid because of tax avoidance and tax evasion over this period will be bigger than that. I have estimated this loss to exceed €1 trillion a year.
And let’s also contextualise this: the EU as a whole has GDP of €13 trillion.
However looked at then the QE programme that has been announced is enormous. So why do it? The aim is simple: it is stated that the aim is to create inflation of 2% when the Eurozone is currently suffering deflation which could become endemic if not addressed.
But, and there is an enormous but to this, whilst the QE programme might achieve the goal of inflation (and might not) whether it does so or not the cost will be enormous.
I stress, I am not opposed to money printing, which is what this programme is.
Nor am I opposed to central banks buying government debt (which I suspect the vast majority of this will be) knowing it will never sell it again, which permanence is inevitable in the current case because there is no situation that I can foresee where markets will ever have the capacity to reacquire the debts now to be purchased by the ECB.
Let’s then be under no illusion: this is a debt cancellation programme through the creation of new money and those who suggest otherwise are as deluded as those who think Greece will now repay all its national debt. All if that is fine, acceptable, and indeed what is needed right now to restore inflation.
What is not needed though is the consequence of this particular type of QE programme which will buy back debt from banks and other financial institutions. These organisations have in recent years proved themselves entirely clueless in the art of investing money for social benefit. Despite this the QE programme will leave these bodies awash with cash. There are inevitable consequences.
First, because these bodies only invest in the private sector and there is no demand for new cash for private sector investment in the EU, or beyond it, this money will not be invested in new productive capital. Not a new job will be created as a result. Not a single social need will be met. Instead the money will be used for speculation. That may be in stock markets, but as much will be in commodities, and because all players in these markets will have more money to gamble the result is inevitable: asset prices will rise, significantly and artificially. This will not be the market at play, this will be distortion. There will be a boom. A bust will follow.