Wednesday, January 28, 2015

A COUPLE of years ago no-one – or very few, at least – had heard the term ‘quantitative easing’, let alone understood what it meant. Now we have a load of experts from all walks of life talking about it as though it were the most common phrase going.

The USA introduced it first. At that time, there were mixed feelings about whether or not it would ‘fix’ its economy. Now Europe has followed suit … and still there isn’t agreement as to whether or not it is a good or bad idea.

All we really know is that a total of €1.14 trillion – I don’t even know how many zeroes are needed to write that – will be pumped into the European economy to try to kick-start growth.

In other words, the banks, which were at fault for irresponsible lending not too long ago, are going to be given access to extra money and – according to the theory – will then lend this out to industry and (to a lesser extent) the private sector.

How successful that tactic will be no-one knows. It would seem that to get the economies of the 19 Eurozone countries going, we need inflation to stimulate job creation and spending. What we have had for the past few years is deflation – and while that means prices have stayed the same or gone down, that doesn’t help create much-needed jobs.

I had heard of the term before. It may not be quite the same, but during the 1920s Germany did experiment with quantitative easing in some shape or form. It printed more and more money and fed it into the economy, but instead of alleviating the depression that its economy was going through at that time, it had the opposite effect. Perhaps that is the reason the Germans were so reluctant this time around to agree to such a move. In the 1920s and early 30s, the result of quantitative easing was rampant inflation. A mere loaf of bread ended up costing a person his or her life savings.

Today, the Germans believe countries with a poor track record will now have an excuse not to be prudent and will not implement reforms that would permanently solve a problem, or go some way towards fixing a problem – just like what we had to do from 2008 until now.

As a result of what happened last week, goods priced in euros are now cheaper when being sold to non-Eurozone countries. For us mere mortal, it means that if we are going over to the UK or America on holidays, we will suffer as the value of the euro against the dollar and sterling has fallen.

Last year, those lucky enough to travel to New York for the annual St Patrick’s Day parade got a cash boost when they converted their hard-earned euros into dollars. By the time the festivities come around this year, both currencies may well be on a par with each other. Those planning to go to Florida in the summer will face the same problem.

So much for quantitative easing.

Comments are closed.

By Michael Godfrey
Contact Newsdesk: +353 59 9170100

More Godfreys Gospel