Performing at a live BBC taping in Dublin during the height of the recession comedian, Tommy Tiernan reflected on the global economic situation. He wondered out loud: “Who does everyone in the world owe money to? And why don't we just kill them, and relax?”
Tommy raises some interesting issues here; he offers a nice outsider's observation on the absurdity of the global economic meltdown.
Facing the threat of an economic black hole forming after the collapse of Lehman Brothers the Federal Reserve did not shoot anyone – but it did take the nuclear option.
It embarked on their first round of quantitative easing, a phrase that has become shorthand for central banks printing money. The central bank buys securities such as government bonds from banks using electronic cash that did not exist before. This floods financial markets with new money and hopes to stimulate the economy. It is only used when other more conventional methods like altering the interest rates can no longer be effective.
After almost 6 years and spending $4.5 trillion, the Federal Reserve’s Open Market Committee announced yesterday that the programme was ending. It had tried to end it two times before but found that the markets were still too weak.
This time it looks like the quantitative easing is really finished. The US is experiencing annual growth of three percent and the unemployment rate is below six percent
The Fed has been pouring money into financial markets but the rising tide has not lifted all boats. Throughout the recovery wage rates have not improved. There are also a significant portion of people employed in part-time positions who are still pursuing full-time jobs.
Yesterday’s Fed statement did alter its outlook on the prospects of the US labour market. It was expected that it would make reference to significant employment issues, but the outlook was more optimistic as it said there has “been a substantial improvement in the outlook for the labour market” – this line has sparked speculation that the Fed may be considering a sooner-than-expected increase in interest rates.
Time will tell if the US economy is really getting back on track, and it will also take time before the full effects of the quantitative easing can be analysed.
Quantitative Easing’s harshest critics feared that the measure would lead to a weakening of the dollar and massive inflation but neither of these scenarios materialised
The other serious concern is the effect that the policy would have on the global economy. It was hoped that quantitative easing would give banks and other financial institutions money to lend to firms who were looking to expand but that hasn't happened on the scale that was expected.
What has happened is an increase in speculative spending in property, share, and commodity markets. The measure is being cited as one of the causes of increased property prices in Europe, Canada, Australia and New Zealand as loose money from the US has spilled into these markets.
In the Eurozone there is a standoff over the idea of quantitative easing. ECB president Mario Draghi has been vocal about his belief that a major quantitative easing program might be necessary to stimulate Europe’s stagnant economy.
German bankers and politicians staunchly oppose the idea, citing fears over the possible inflation and market distortion that the unconventional economic measure could cause.
At this stage the ECB is running out of options. German politicians still favour austerity and deficit reduction, but without some kind of major-play it is hard to see how the European economy can be turned around.The ECB interest rate is already close to a zero so the bank cannot use it as a tool to boost activity.
It is estimated that 45 million workers are jobless in OECD countries. Eurozone states are becoming increasingly vocal in their opposition to German-style austerity policies. France and Italy’s proposed 2015 budgets were rejected by Brussels on the grounds that they were not doing enough to cut their deficits. French politicians reacted angrily to the news and initially indicated that they would not alter their plans.
Quantitative easing is a potentially dangerous and highly unconventional measure but it is one of the few possible measures that could be used to kick-start economic activity in Europe. While opinions remain split the end result could be a watered-down quantitative easing programme which could end up being the worst of both worlds.
