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January 24, 2015


Much is being made of the dramatic decision of the EU to buy zillions of euros of bonds of the 19-member euro currency union (over the usual objections of Germany). Like Japan, the supra-national currency union may be too late. Japan is also on a bond-buying track and it is nevertheless in recession amidst price deflation. Aggregate demand in Japan is currently continuing to head south no matter what their central bank buys or how much it buys. The timing of quantitative easing, as such bond-buying by central banks is called, came too late in Japan for a quick recovery and may be too late for the EU to effect a speedy recovery as well.

It is not just stimulus but timing of its application that can be crucial to economic recovery. Japan’s was too late and its recovery will be correspondingly delayed; we will see how the EU’s rescue plan works. Some European economists say the real purpose of such quantitative easing by the EU is more of an operation to drive the value of the euro down than to stimulate the economy, though the two are, of course, intertwined, especially in areas such as foreign trade, foreign investment and tourism.

A cheaper euro means, for instance, that EU exports will be cheaper in importing countries such as the U.S., and also means that our dollar-priced exports to the EU will be more expensive in the EU, which is bad news for our already lopsided trade deficit. Foreign tourists (American, Chinese etc.) will find cheaper rates for vacations to EU venues. American investors in the stock of, for instance, a French corporation will get a price discount as well. On the other side of the coin, EU vacationers to the U.S., for instance, will find higher costs, which is not good for our domestic tourist industry. Our (relatively speaking) high priced dollar-denominated exports (which constitute 14% of our economy) will be adversely affected as well, especially since the EU is one of our largest export markets.

Obama’s Keynesian decision to provide stimulus to our economy is what saved our post-Great Recession from lasting longer, but when Republicans (prematurely) put an end to that program and signs of recession reemerged, we can all be thankful that the Fed had decided to prop up the economy via quantitative easing with massive purchase of bonds, and it seems to have worked since the Fed is now ending such purchases as the economy shows signs of recovery (though, as I have often lamented, wage inequality and demand-killing austerity policies persist  as a drag on the speed and strength of our recovery).

Economists are beginning to think that deflation (a la Japan) is a bigger enemy to economic growth than inflation. Most economists think a 2% rate of inflation is healthy along with a 3 to 4 percent rate of economic growth (including our Fed Chair, Janet Yellin) , but even with our Fed’s trillions of bond-purchasing, our actual inflation rate for last year was – along with our rate of economic growth, under both such rates, respectively. These numbers are hardly harbingers of an economy that could otherwise be performing well had we applied Keynesian policies, ended wage inequality and abandoned the dead-end austerity policies favored by Republicans and their patrons on Wall Street. We are better off than most other economies around the world at this time, but that is a relative statement. The world is performing poorly, so in my view the contrast is not genuine, thus invalidating Wall Street and financial press cheerleading (aka we’re number one! propaganda).

While the so-called “quantitative easing” involved in such purchases did great things for the rich and investment class (witness the Dow), it did little for the great bulk of Americans. Thus our employment numbers are up, but who is to say that that is a result of the Fed’s purchase of bonds or a cyclical move that would have happened anyway. Furthermore, as I have blogged many times, increased employment means little in terms of aggregate demand unless fortified  by across the board and substantial increases in wages, wages that have suffered forty years of wage inequality as labor’s marginal productivity has gone unshared with corporate work forces and instead overflowed into the pockets of shareholders and overpaid executives.

The EU has decided to do something about its members’ weakening economies via quantitative easing, and I applaud such a (faintly) Keynesian intervention into the affairs of otherwise sovereign states, though I think a much bigger dose of Keynesianism by government itself rather than providing the wherewithal to private enterprise via cheap money and bond-buying would bring their economies back up to snuff much sooner.

It is a step in the right direction, though one I consider to be timid in view of the stakes involved. Nonetheless, it is a recognition that spending is not a dirty word, but on the contrary provides the groundwork for economic recovery. I wish the EU well in its endeavor.  GERALD   E

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