The Potential of QE

 

WEEKLY COMMENT 8-12-2016

By Barry Edwards

The Potential of QE

 

An article in the Financial Times caught my attention yesterday headed ‘Blackrock calls for QE boost to infrastructure’ which is summarised below;

“The European Central Bank should retool its asset-purchase programme to fund a wave of new infrastructure spending across the continent, according to one of the world’s most powerful bond managers. Rick Rieder, global chief investment officer of BlackRock’s $1.6tn fixed income business, says the ECB has the opportunity to unleash hundreds of billions of dollars in new economic activity by shifting more of its purchases towards bonds issued by the various national and supranational organisations, such as the European Investment Bank, that fund infrastructure and provide trade finance.”

While I was researching other articles on this subject I came across a short paper (5 pages) from Richard Murphy on his blog TaxreseachUK describing another approach to finance Green Infrastructure which also explains how quantitative easing (QE) works in simple language. If you click on the link below you can read the paper;

http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/

If you do not have time to read the paper a short summary is below;

“What is needed now is a QE programme that would stimulate the economy, boost employment and tackle climate change. This could be achieved if QE funding was used to fund essential infrastructure improvements across the UK. That could increase employment, create new business opportunities, broaden the tax base and, most importantly, create the infrastructure that could be the basis for future prosperity in the UK that the government, most political parties, the private sector and trade unions all recognise that we now need.

Nothing but government investment can turn the UK economy around given that private investment is falling at present, consumers are cautious about borrowing to spend and real wages have still, for most people, not reached their 2008 levels. At the same time EU and other overseas markets look very unlikely to give the export boost that is the only other way to kick start economic activity in this country.

What has been missing to date is the mechanism to fund this essential new government investment, and Infrastructure QE provides this.”

Both writers are proposing that QE is used to fund climate change investment and infrastructure. Richard Murphy’s paper was written 18 months ago but it is still just as relevant now. If you do have the time I would recommend that you read the paper, he explains the ramifications of QE very well.

As we all now know, Donald trump has proposed substantial investment in infrastructure and he may well use these techniques to save increasing government debt and a long battle with Congress to raise the limits allowed. It makes perfect sense for the European Central Bank (ECB) to adopt this approach and incorporate it with the Juncker plan where the increase in the amount available for investment to €500 billion has been agreed this week. In effect that means the ECB would buy the bonds issued by the European Investment Bank (EIB) and the other government agencies that participate in these activities. The Bank of England could also instigate a similar plan.

Instead of buying government debt The ECB would be participating in the real commercial world making a major contribution to growing the economy rather than increasing asset prices which is the effect of their activities so far. The difference this would have made to the EU economy if it had been adopted after the financial crisis would have been enormous and instead of no or very slow growth there could well have been real long-term growth substantially reducing unemployment.

The EU may well be in a very different place today and many of the problems we are now encountering would probably not be occurring which would have allowed the EU to reform and become much more relevant to the lives of the people. It would still be possible for these techniques to be adopted but it does take time for the affects to filter through to the real economy. The politicians would have to explain the long-term growth plan and the reform of the EU to convince people to go along with the concept which still may not change the attitude people have that the EU is failing them.

The only EU leader in power now who could be convincing is Angela Merkel if she could persuade the German parliament to get behind her. That is a big ask currently but the potential may well win the day at this late stage especially since Germany would be a major beneficiary of the plan. Something has to be done to hold the EU together and this QE idea is currently the only method that has any chance of achieving the objective.

That’s all for this week, more observations next week.