“The evidence is that the move will not lead to any significant increase in bank lending to the private sector. After all bank loans are not constrained by the volume of reserves that the banks have. Rather they are determined by the demand for loans by credit-worthy borrowers and with conditions so bleak in the Eurozone at present, that class of firm or person is rather scarce.

It was expected that the ECB would also ramp up its qualitative easing program to around €80 billion per month. The ECB kept its current purchase program unchanged at around €60 per month, although it indicated it would maintain the program for at least a further six months and would broaden the bond categories that it would be purchasing.

None of this is going to have any substantial effect on real output growth in the Eurozone and the evolution of the unemployment rate there.

The quantitative easing program is an asset swap (reserves for bonds) and can only really impact upon aggregate spending via its effect on yields on the asset class being bought and then the associated decline in rates at those maturities for other investment assets.

In other words, quantitative easing reduces long-term interest rates which may encourage investment if the cost of capital is the only difference between a project being profitable or not.

The reality is that forward-looking expectations in the Eurozone remain highly pessimistic and the current capital stock is probably more than sufficient to meet the growth in sales and so there is little incentive to engage in large-scale capital investment projects at whatever cost of capital.

It is for that reason that quanitative easing programs in the US, in the UK, in Japan, and now in the Eurozone failed to act as a broad stimulus for economic activity. There is some evidence that they stimulate certain asset markets but full employment depends upon growth in real goods and services not the growth in prices of real estate, for example.

The fact that the inflation rate is skating around zero at present and unemployment is stuck around 10.7 per cent is indicative of the point that Modern Monetary Theory (MMT) proponents make about the ineffectiveness of monetary policy interventions.

Quite simply, the Eurozone is relying on the wrong policy tools to stimulate its stagnant economy and that reliance is indicative of the stubborn denial that comes with neo-liberal Groupthink.

The policymakers are so stuck in their Monetarist-type thinking that they have placed their most effective policy tool – that is, fiscal policy – in a straitjacket and continue to play around with the impotent monetary policy tools at their disposal.

The ECB would make an almost instant contribution to growth if it posted out a ‘package of euros’ to every unemployed person in Europe. That fiscal intervention would immediately stimulate sales and possibly provide the basis for some crowding in of private investment spending.”

Dakienak badaki, ez dakienak baleki!

1 Ikus Elkarrizketa W. Mosler-ekin; Elkarrizketa W. Mosler-ekin (zenbait zipriztin-1); Elkarrizketa W. Mosler-ekin (zenbait zipriztin-2) eta Elkarrizketa W. Mosler-ekin (zenbait zipriztin- eta 3).

2 Ikus http://bilbo.economicoutlook.net/blog/?p=3248 8.

joseba says:

2015/12/07 at 08:55

Comments on Draghi NY Speech

http://moslereconomics.com/2015/12/06/comments-on-draghi-ny-speech/

Excerpts from the Speech by Mario Draghi, President of the ECB, Economic Club of New York, 4 December 2015:

Draghi: There is no particular limit to how we can deploy any of our tools.

Mosler: True- limits are political

D: And in this context it is important to recall that we operate under a clear framework of monetary dominance – we are ultimately driven by our mandate of maintaining price stability.

M: True

D: Indeed, it is inevitable that unconventional policy settings, ranging from negative interest rates to purchases of a broad range of assets, can have unintended consequences on allocation and distribution.

M: Yes, and as they function like taxes to remove euro net financial assets from the private sector, they can have the (presumably) unintended consequences of reducing aggregate demand, reducing ‘inflation’, and, likewise, fundamentally causing the euro to appreciate and further exacerbate the other unintended consequences.

D: In the selection of our policy tools, we aim to minimise the extent of such distortions, which is why, for instance, we have so far focused our asset purchases as much as possible in the most liquid and generic asset classes.

But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would.

M: Yes, however removing more euro removes more aggregate demand, is deflationary, and further supports the euro.

As the carpenter said about his piece of wood, ‘no matter how much i cut off it’s still too short’

D: There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate. And indeed the European Court of Justice has stated that the ECB must be allowed “broad discretion” when it “prepares and implements an open market operations programme”.

M: True, potentially they can perform the miracle of making the blind man lame, so to speak…

D: I can say therefore with confidence – and without any complacency – that we will secure the return of inflation to 2% without undue delay, because we are currently deploying tools that we believe will achieve this, and because we can, in any case, deploy our tools further if that proves necessary.

M: As the Bank of Japan, after 20 years of similar policy, and the Fed after 7 years of similar policy have continued to say with regard to meeting their inflation targets, after 6 years Draghi also repeats:

“We just need a little more time to allow our monetary policy to kick in…”

🙁

Iruzkinak (3)

joseba says:

2015/12/07 at 08:55

Comments on Draghi NY Speech

http://moslereconomics.com/2015/12/06/comments-on-draghi-ny-speech/

Excerpts from the Speech by Mario Draghi, President of the ECB, Economic Club of New York, 4 December 2015:

Draghi: There is no particular limit to how we can deploy any of our tools.

Mosler: True- limits are political

D: And in this context it is important to recall that we operate under a clear framework of monetary dominance – we are ultimately driven by our mandate of maintaining price stability.

M: True

D: Indeed, it is inevitable that unconventional policy settings, ranging from negative interest rates to purchases of a broad range of assets, can have unintended consequences on allocation and distribution.

M: Yes, and as they function like taxes to remove euro net financial assets from the private sector, they can have the (presumably) unintended consequences of reducing aggregate demand, reducing ‘inflation’, and, likewise, fundamentally causing the euro to appreciate and further exacerbate the other unintended consequences.

D: In the selection of our policy tools, we aim to minimise the extent of such distortions, which is why, for instance, we have so far focused our asset purchases as much as possible in the most liquid and generic asset classes.

But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would.

M: Yes, however removing more euro removes more aggregate demand, is deflationary, and further supports the euro.

As the carpenter said about his piece of wood, ‘no matter how much i cut off it’s still too short’

D: There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate. And indeed the European Court of Justice has stated that the ECB must be allowed “broad discretion” when it “prepares and implements an open market operations programme”.

M: True, potentially they can perform the miracle of making the blind man lame, so to speak…

D: I can say therefore with confidence – and without any complacency – that we will secure the return of inflation to 2% without undue delay, because we are currently deploying tools that we believe will achieve this, and because we can, in any case, deploy our tools further if that proves necessary.

M: As the Bank of Japan, after 20 years of similar policy, and the Fed after 7 years of similar policy have continued to say with regard to meeting their inflation targets, after 6 years Draghi also repeats:

“We just need a little more time to allow our monetary policy to kick in…”

🙁

Erantzun
joseba says:

2015/12/07 at 22:14

Warren B. Mosler ‏@wbmosler
@wbmosler Let me add “Often wrong but never in doubt…”

Erantzun
- joseba says:
  
  2015/12/08 at 17:43
  
  Draghi quote,…
  
  http://moslereconomics.com/2015/12/08/draghi-quote-euro-purchasing-power-parity-small-business-index/
  
  Posted by WARREN MOSLER on December 8, 2015
  W. Mosler:“Often wrong but never in doubt”?
  😉
  
  Quote from Mario Draghi:
  
  But there is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would. There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate. And indeed the European Court of Justice has stated that the ECB must be allowed “broad discretion” when it “prepares and implements an open market operations programme”.
  
  I can say therefore with confidence – and without any complacency – that we will secure the return of inflation to 2% without undue delay, because we are currently deploying tools that we believe will achieve this, and because we can, in any case, deploy our tools further if that proves necessary.“
  
  Erantzun