The ECB has Thursday, January 22 agog many economists using the “Quantitative easing” (QE): it will buy government debt securities, up to 60 billion euros a month between March 2015 and September 2016. Before her, the US central bank, British, Japanese have used this method. However, this decision is seen by many commentators as extremely “adventurous.”
# QE, what is it?
QE, or quantitative easing is the fact that a central bank to buy assets (usually securities) with money it creates.
This is a tool to inject money in the circuits of the economy, with the hope of jump-start
It is said that the central bank “turns printing money” which is obviously a metaphor. There neither board nor tickets, just a writing game. The central bank will write to these registers the amount of money used to purchase the securities, and that will be played.
# Why QE is considered exceptional?
Normally when a central bank wants to stoke the economy, it does not resort to QE. It merely lend to the very short term a little more money from usual banks to lower interest rates. These rate cuts are passed on by the banks to their customers, which helps applications for loans. The activity is well stirred.
When short-term interest rates approach zero, the “conventional” tool no longer works. We have to find something else. The banks use less orthodox tools (called “unconventional”)., Starting with QE
For a central bank, the QE is no longer creates money to finance banks’ lending activity, but to directly buy shares on the market. What titles do you speak? In general, as “government bonds” of securities representing a claim on a particular State and which are traded on the market, from hand to hand, sometimes a long time
The #. QE allows it to reduce the debt of states?
It is improper for it is said that ECB will “buy the debt.” When the central bank buys these bonds, originally issued by states, it does not reduce public debt. The money she has created is not going to the States: it goes to the holders of securities that may be of savers, mutual funds, insurance companies, banks, etc.
Like when you. buying a used Renault: Renault is not who benefits is the guy who sells you
Those who sell those bonds to the central bank receive a sum of money. they will spend or they will invest: these are the acts that will support then (theoretically) the activity.
# Why does she think that the ECB QE will be good for the economy?
The goal is that these investors who sell their shares to the ECB will be pushed to make loans or riskier investments. Bonds become less interesting effect. Why?
- 1), the ECB buys bonds.
- 2) the application of such securities increases.
- 3) therefore their price rises .
- 4) If the bond prices rise, their performance declines.
You do not understand the point 4? It should then focus a minute, the time to read the following three paragraphs.
Take the example of a state that borrows 100 euros (it is not very greedy, ok) that promises to pay 3% per year. This loan is in the form of an issue of bonds 10 to 10 euros, which are then freely traded on the market
If the ECB buying these bonds, the demand increases, the price rises. This is the result of a stupid law of supply and demand. For example, they pass from October to December euros.
The interest rate is still 3%, but to calculate the yield of the title, must now bring it to 12 euros instead of 10 euros starting. The yield is increased from 3% to 2.5%.
It is thus found that to massively buy bonds lowers their performance. Investors are therefore pushed to other types of products such as bonds that yield less: the banks will lend more money to companies or individuals, the others will be interested in riskier investments, in start up, in SME …
# What will the ECB bought these assets?
As long as it has the property, the central bank key interest paid by States. Which does not lack spice: the snake bites a little tail
In theory, when the economy gets better, the central bank will sell the securities it has purchased.. It is said to “sterilize” Operation:. It will destroy the currency it has created temporarily, which will prevent a surge in inflation
# Y-he has inflationary risk?
If too much money flows in relation to economic activity, inflation tends to point his nose.
This risk does not worry many people for the moment: the euro zone is now threatened by deflation (which would for once a nightmare), not inflation <. / p>
A little inflation does no harm. It would allow fresh erosion of debt, the continuing decline of the euro (and thus a boost to exports), and some adjustments (wages in business management, for example).
The fear anti-QE economists (and in many encounters in Germany) is that inflation is racing and distorts economic calculations.
# Why inflation serait- it bad for the economy?
The answer to this question is far from obvious. Imagine that multiplied by 100 all prices, all wages, and money in circulation. It would be a simple convention, which would not affect the economy (France had also done the reverse in 1958, creating the franc “heavy”).
But the Inflation is not a mere convention orchestrated in advance. It is a phenomenon with winners and losers, where everyone – business, employee, investor, supplier – tries to pull out of the game, avoid falling behind. And this has always tend to get carried away. Sooner or later, the central bank or the government must intervene to stop this runaway by painful interest rate hikes for the economy and / or a policy of austerity.
The main cost inflation, this is likely backlash that brings down growth.
The other cost is the distortion of the structure of relative prices. Prices move against each other. If evolution is unpredictable, companies make bad decisions. They renounce eg investment projects that become too risky.
But it is not there. For the ECB, urgency, no offense to the anti-QE, is to break the spiral that currently leads the eurozone into deflation.
Pascal Riché
No comments:
Post a Comment