The United States’ and European Union’s central banks have started what they call “monetary tapering”, meaning the progressive abandonment of their “quantitative easing”, or money printing scheme, to use a phrase they refuse to acknowledge. But this is what it is when they create money out of thin air to purchase state bonds. This return to normalcy, on the surface, seems to be a step in the right direction toward a sounder economy less addicted to liquidity... but is that the case?
We have already noticed that the Fed has stopped its QE in October, 2014, but that the ECB has, in a certain way, taken over in starting its own QE in March, 2015. However, the European institution has recently announced some tapering to come by winding down its monthly asset purchasing program to 30 billion euro (from 80 B, then 50 B) until stopping entirely in the course of the year 2018. So, are we witnessing a return to a sounder monetary and financial system? Well, I’m not so sure about that.
As a matter of fact, according to a study by Banque Natixis, global liquidity will continue to increase rapidly despite the change of direction from the Fed and the ECB, for two main reasons:
The very expansionist monetary policy from Bank of Japan –
And a return to an increase in monetary reserves for central banks, notably China’s, with its re-establishment of capital controls.
It seems like they’re playing a game of hot potatoes with their QEs... When the Fed stops, the ECB takes over, and the BoJ picks up the potato. As for China, its trade surplus stays “captive” because of capital controls, and the People’s Bank of China invests its surplus in Treasury bonds, which is akin to a “Chinese QE”. And beyond Japan and China, these expansionist policies or capital controls – in order to capture the trade surpluses – are quite widespread among the emerging countries, which add even more liquidity.
Importantly, one must know that the public debt of large countries is widely internationalised: 51.5% of American debt is owned by foreign investors, as well of 61.3% of German debt, 56.4% of French debt, 45% of Spanish debt, and 34.7% of Italian debt. As is well indicated in the Natixis study, “When a public debt is internationalised, its interest rate depends on global liquidity, not on the issuing country’s liquidity.”
Monetary tapering from the Fed and the ECB, blaringly announced in the media, are thus without any effect; they will not help in emerging from the lethargy of zero or negative rates. The lax monetary policies that have stemmed from the 2008 crisis are continuing, in one form or other. This “return to normalcy” is actually an illusion; on the contrary, it is a crisis of inflation and banking failures that constitute the horizon for this mountain of liquidity.