The ECB, QE and escaping stagnation

The announcement by Mario Draghi at the council meeting of European Central Bank (ECB) yesterday that the ECB and the national central banks of the Eurozone would inject €1.1trn of new credit over the next 18 months into the area’s banks has certainly had a quick result. The euro dropped to an eleven-year low against the US dollar.


The ECB has finally joined the Federal Reserve, the Bank of England and the Bank of Japan is what is called outright quantitative easing (QE). This is the outright purchase by the central banks of government, corporate and real estate bonds paid for by ‘printing money’, or more precisely electronically creating reserves of money in banks.

Up to now, the ECB has shied away from doing this QE and instead merely lent money or credit to the banks for increasingly longer periods of time (now up to three years) at virtually zero rates of interest. The German and northern European governments were opposed to the outright purchase of the bonds of Ireland, Spain, Portugal, Italy and Greece, the profligate governments. They feared that such purchases would allow these governments to spend as they pleased and put at risk the German taxpayer from any defaults on this debt.

But such has been the stagnation of most Eurozone economies and the growing prospect of outright deflation that the Germans, Dutch and Finns have been ‘persuaded’, kicking and screaming, that the ECB must go for broke and buy Italian and Spanish bonds held by banks, insurance companies, pension and hedge funds and hope that it helps kick-start the Eurozone economy and avoid deflation.

As I explained in a previous post
and also now in an article for the Weekly Worker this week
there is the spectre of deflation hanging over Europe, which could drag the whole region into a deep depression and a renewed euro crisis. So action was needed.

The Draghi package is much bigger than expected, injecting funds equivalent to 0.6% of Eurozone GDP every month. This is bigger in relative terms than any other QE programme from the Fed, the BoE or the BoJ.

ECB balance sheet

There was a figleaf to the German doubting Thomases in that 80% of the supposed risk from new purchases of government debt would be down to national central banks and not shared across the Eurosystem. But that’s an illusion: if any national central bank got into trouble with losses from the purchase of its own government’s bonds, the ECB would have to bail them out anyway.

So the real question is: whether this huge QE will lift the Eurozone economy from its near deflationary depression. Well, it certainly is driving the euro down. That will help Eurozone exporters to compete in world markets against the likes of the Swiss, US and some Asian producers. But as most exports of each EMU member state are to each other, a weaker euro will not be enough to get things going.

Unless real wages (which have been falling in most Eurozone economies) and business investment (which remains stagnant in most Eurozone economies) start to pick up, there will be no escape from stagnation and depression. And QE will not do that, as I explained in more detail in a previous post ( Since the use of QE from 2010 by various central banks, global growth has remained weak and below trend and the recovery in employment and investment has been poor despite a huge electronic printing of money.  Real economic growth has not responded.

It’s demand for credit or money that drives the supply of money, not supply creating demand. And the demand for money has been weak because economic activity is weak. To use another cliché: you can bring a horse to water, but you cannot make it drink.  The ‘money multiplier’, the ratio of the amount of money printed by the Fed relative to the amount of money flowing into the wider economy has dropped like a stone.

money multiplier

QE has not worked in raising rates of economic growth back to pre-crisis levels. So where has all the money gone? It has gone into the banking system to shore up their balance sheets and restore their profits. And it has engendered a massive bubble in financial assets; and the prices of government and corporate bonds and most of all, stock prices, have rallied to record highs.

QE and stocks

The only beneficiaries have been the top 1% of wealth holders everywhere as they own the bulk of financial assets.

When QE was begun back in 2010, mainstream economists, both monetarists like former Fed chair Ben Bernanke and Keynesians like Paul Krugman, saw QE as the main economic weapon to get economies moving. Krugman even argued that the Bank of Japan’s QE programme would get Japan out of its stagnation.

How wrong can you be? The BoJ’s target of a 2% inflation rate remains a chimera some four years later, while Japan’s real economy hovers near recession, despite a QE programme that has meant a rise in the BoJ’s holdings of government bonds equivalent to 50% of GDP and rising ( It will be the same result for the ECB’s QE programme: the euro may fall, as did the yen after the BoJ started its programme. But there will be no significant recovery in economic growth.

The Keynesians go insisting for even more QE. But they also look to more fiscal action, namely running higher budget deficits for longer so that governments start to spend more on infrastructure, government services and benefits and even defence. This might provide some limited support for growth. But extra government borrowing is anathema to the strategists of capital because it would eventually mean higher interest rates and possibly higher taxation down the road, and thus lower profitability at a time when profitability in most economies is still below the level before the Great Recession (see my post, and the joint paper by G Carchedi and me on the effectiveness of Keynesian-type fiscal spending, The long roots of the present crisis).

Indeed, far from looking to increase QE or government spending, the US Fed is getting ready to hike its ‘policy rate’ later this year. And the risk is that if the Fed does implement a hike in interest rates in 2015, then the financial boom will also collapse and profits will begin to fall, increasing the risk of a new slump (see my post,

Mainstream economists have started to recognise that the major capitalist economies are not ‘returning to normal, but are locked into something they now like to call ‘secular stagnation’, the main theme of the recent annual meeting of the American Economics Association (see my post). How can economies escape?

A new report from the OECD attempts to provide some answers (escaping-the-stagnation-trap-policy-options-for-the-euro-area-and-japan-1). The OECD is starkly clear: “The global economy continues to run at low speed and many countries, particularly in Europe, seem unable to overcome the legacies of the crisis. With high unemployment, high inequality and low trust still weighing heavily, it is imperative to swiftly implement reforms that boost demand and employment and raise potential growth. The time to act is now. There is a growing risk of persistent stagnation, in which weak demand and weak potential output growth reinforce each other in a vicious circle.”

Even more darkly, it goes onto to say: “The cylinders of the world economy continue to fire at only half speed. Growth is low and uneven and some parts of the world, such as the euro area, are at risk of falling into a trap of persistent stagnation, an extended period of low overall economic activity and low employment despite extraordinary monetary stimulus. A vicious circle is developing, with weak demand undermining potential growth (e.g. via a deterioration of the capital stock, structural unemployment and higher inequality) and weak potential growth further reducing demand (e.g. by discouraging capacity-expanding investment).”

It really could not be worse, short of another global slump. So what is to be done?

The OECD backs the current policy of QE and talk of investment spending. “With Japan’s launch of the “three arrows” in 2013, the EU’s recent launch of an investment plan and the euro area’s expected move towards quantitative easing, the likelihood of escaping the stagnation trap is increasing.” But it won’t be enough: “further action is needed to sustain this positive reform momentum.”

And what could this be? “structural reforms are urgently needed to remove regulatory bottlenecks to investment, reduce the administrative burden for business, and facilitate company restructuring.” In effect, the OECD wants even more deregulation in business practices, complete ‘flexibility’ in labour markets and more free trade, particularly in services: “reducing regulatory barriers …Further dismantling border and behind-the-border barriers to the international movement of goods and services will serve both to expand demand and make markets more competitive and dynamic”. In other words, the OECD wants more ‘neoliberal’ policies to allow ‘market forces’ to work. In effect, it wants ‘free markets’ in labour to keep wage costs down and free movement of capital internationally to raise profitability. Apparently, the problem is that capitalism is not being allowed to work, not that it does not work.

QE has failed in the last four years to get the major capitalist economies going; fiscal deficit spending has not worked in Japan either; so the strategists of capital look to the ‘third arrow’ of weakening labour and extending the ‘free’ movement of capital as the answer. But another slump that destroys capital values and raises average profitability is more likely to be the way out for capital.

6 thoughts on “The ECB, QE and escaping stagnation

  1. Michael,

    I agree with most of the thrust of this article that QE cannot work, because money tokens are only devalued, causing the general price level to rise, if those money tokens and credit money actually go into circulation. If additional credit is not demanded, the velocity of circulation slows down to compensate. As Marx sets out, in his analysis of the interest rate cycle, at a time when there has been a huge rise in the rate and mass of profit, such as we have seen since the late 1980’s, the demand for bank credit falls, because firms generate the money-capital they require internally from their realised profits, but also for the same reason they demand less bank credit, because commercial credit extends massively – that is as he describes one firm simply gives credit to its customers, by giving them much longer to pay for purchases and so on – these mutual credits between firms then get netted off, so that the demand for money is reduced to only that required to cover the balance.

    So, despite the large rise in global capital formation after 1999, and growth of trade the rise in the mass of realised profits was so great that large corporations, and states amassed huge volumes of loanable money-capital, pushing global interest rates lower. It conforms with the description of that phase of the interest rate cycle Marx described when he wrote –

    “After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the “sound” basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising.”

    (Capital III, Chapter 30)

    However, you write,

    “But extra government borrowing is anathema to the strategists of capital because it would eventually mean higher interest rates and possibly higher taxation down the road, and thus lower profitability at a time when profitability in most economies is still below the level before the Great Recession.”

    That quite clearly is not true, either that the strategists of capital believe that it must result in higher interest rates, or that it must result in lower profits. Its certainly true that the conservative ideologists of that financial capital, who have been continually bailed out, and their bankruptcy hidden by continual injections of liquidity would not want a fiscal expansion, but the interests of industrial capital, particularly big industrial capital most certainly lie with such a fiscal expansion to ensure that the money printed serves some purpose in the real economy, by stimulating economic activity.

    That indeed, is why the home of that big industrial capital, and the representation of its interests – in the US, and via the US Democrat party – has carried out such large scale fiscal stimulus for the last 6 years, including nationalising and recapitalising Ford, GM and so on – and during that period has been calling on Europe to do the same. A similar policy has been undertaken in the world’s largest or second largest (depending on how you measure it) economy in China, as well as in Japan.

    But, we have also seen in recent weeks Draghi himself and others saying as openly as they can that there are limitations to monetary policy, and that the EU needs to undertake fiscal stimulus.

    If we take the US experience, the US of Keynesian fiscal stimulus over the last 6 years has not caused either interest rates to rise, or profit rates to fall. Rather the US has avoided, despite the setbacks caused by repeated political crisis inflicted by the Republicans and Tea Party over the debt Ceiling, Budget and Sequester, the kind of continuous slide into low growth that has been experienced by the UK, and those other parts of Europe that inflicted austerity on their economies.

    In fact, it is the latter economies where the most austerity was imposed, where interest rates went through the roof in 2010, and where profits have collapsed. Rather than US interest rates rising due to fiscal stimulus they have fallen! That in large art is due to the fact that even as global rates start to rise, the US is seen as a safe haven, so that hot money flooding out of emerging markets, following the ending of QE, has encamped in the US.

    Nor is there any reason that fiscal stimulus under current conditions will cause profits to fall now or in the future, because if economic growth increases as a consequence, the potential for capital accumulation, rather than the continued flow of potential money-capital into financial assets increases. Anyone who doubts that should watch the programme recently about the “Super rich and Us”, which documented the way the number of “Buy To let Landlords” has increased massively in the UK, with seminars being run on how to make millions from it.

    If you had a million pounds, and had the choice to invest it in buy to let properties, that create no wealth, but which can go up in price by 30% a year, because they are backstopped by government money printing, and schemes such as buy to let, why on Earth would you instead invest that million pounds in real productive capital, producing widgets, which might only pay you back profits several years down the road, and which are less certain than property speculation?

    The two things are connected. Central banks have printed huge sums of money tokens, and created masses of credit money to keep the banks afloat, and one means of doing that is to inflate the nominal value of bank capital by pumping up asset price bubbles in stocks, bonds and property. Its the fact that liquidity has flowed into those spheres rather than into the general economy that explains why there has been hyper inflation of the former, and disinflation of the latter.

    But, if the state engaged in fiscal expansion across the globe, economic activity would pick up, the velocity of circulation would rise, and that huge mass of liquidity would flow into the real economy causing inflation to rise, and global interest rates would rise – as indeed they are in emerging markets already. The consequence of rising interest rates would not be to choke off economic activity – we are at levels not seen since the Black Death, and the increased mass of profits could easily accommodate any such rise – but it would cause all those people who have taken out mortgages they cannot afford to default, it would cause property prices to collapse, in a way they did in 2008, and are doing in China, and it would cause stock and bond prices to collapse.

    The consequence of that would not be a collapse of industrial capital, but a collapse in the power of financial capital. What we are witnessing, as marx described in Capital III, is policy being dictated not by the interests of productive-industrial capital, whose expansion is being hampered, but by the interests of money-lending capital, the defence of the nominal value of bits of paper at the expense of the destruction of real productive wealth.

  2. Boffy needs a fact checker, or at least a continuity editor. For example, the TARP program in the US did not bail out Ford Motor Company; Ford neither requested nor received aid under TARP. GM and Chrysler did, but those programs hardly stimulated economic activity. Rather those programs brought about significant reductions in productive assets, wage and benefit obligations etc, labor forces.

    Secondly, Boffy claims that since the 1980s there was a huge rise in the rate and mass of corporate profits. Facts please?

    Earlier Boffy has identified the period 1974-1999 as a “long downturn.” How does one reconcile a “long downturn” with “a huge rise in the rate and mass of profit, such as we have seen since the late 1980’s”?

    Also, exactly where did corporate debt decline as the mass and rate of profit improved after the late 1980s? Didn’t happen in banks, obviously, as that capital structure is overwhelmingly commercial paper based.

    Non-financial corporate businesses in the US steadily increased bank debt throughout the 1990s, and continued to do so, albeit at a much slower rate after 2000– given the 2001 recession- to which the bourgeoisie’s response was to impose drastic limits on capital spending, and literally consume fixed capital above the replacement rate, while holding down wages. Increases in the mass and rate of corporate profit did not allow companies to become “self-financing.”

    Large corporations amassing hoards of loanable capital? Which corporations, and loanable to what corporations for what purposes? GE, GM, etc. certainly extended their consumer credit facilities, and their cash assets, but if you look at the record of investments, corporations used there increasing cash for 1)stock buybacks 2) investment in short-term cash- type securities of high liquidity and security– i.e US Treasury instruments. And GM, and GE spun off those consumer loan facilities because of their poor performance.

    And this:

    “What we are witnessing, as marx described in Capital III, is policy being dictated not by the interests of productive-industrial capital, whose expansion is being hampered, but by the interests of money-lending capital, the defence of the nominal value of bits of paper at the expense of the destruction of real productive wealth.”

    is the typical social-democratic nonsense, positing some fundamental conflict between “productive-industrial capital” which supposedly wants “expansion” and the “predatory, parasitic” finance capital” that in contradiction to our “productive capitalists” wants to destroy “real wealth,” as if the the destruction of real wealth is not inherent in, immanent, to so-called “productive capital,” as if that destruction is not rooted intrinsically in the production of value; as if the “conflict” is not a mere appearance, the result, of the overproduction of capital as capital; a manifestation of the tendency of the rate of profit to decline.

  3. Michael,

    The graph of the other day, was “shot up” by excluding Germany, in the 1st world war, and including Argentina and Sweden with high rates of profits. But, what if these are really repreentatives of rates of profits of periferic countries and colonies? That would be a nice discovery!

  4. Reblogged this on Don Sutherland's Blog and commented:
    Who In Australia would trust the Abbott and Hockey allince with the Business Council of Australia to manage the economy in the nex financil crisis?
    Remember that when Rudd Labor came to office in 2007 it soon had to manage he impact on Australia of a global economic crisis, usually called the GFC. In a mild, Keynesian way that did a reasonable job.
    Well, Davos and Draghi are now talking and acting that the handling of the 2007 crisis is now leading towards another global economic crisis, even before any real sign of recovery frm the first one.
    There is no chance that the Abbott government and the BCA will handle this “new” situation democatically, that is in the interests of the majority. Their current standards of competence suggest they wont even be able to handle it competently for their very own and precious 1%.
    Well, that leaves the issue o the propect of a new Labor government, under its right wing led by Bill Shorten. What will they do? How much confidence do wehave in right wing Labor under Shorten and probably Chris Bowen to govern for the majority?

  5. Thanks for writing the blog Michael.
    I feel I learn so much. Try as I might, I’ve spent forty years trying to make sense of the world, by reading through the fog and propaganda of even the so called ‘quality’ press and other mass media. I just ended up confused and gloomy, because the system was conspicuously going down the tubes in front of our eyes, and they kept telling us that everything would quickly be back on track?
    You are a ray of clarity.

  6. Given the recent well publicised pronouncements by BoE Governor, Mark Carney, attacking the policy of austerity in the EU, as well as the articles in the FT setting out at greater length why austerity (which of course, in any case, means a reduction in the extent of budget deficits not budget surpluses) is counter-productive for the interests of capital, it appears that they must not have received the e-mail setting out that such an approach, of fiscal stimulus “is anathema to the strategists of capital”.

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