Money for nothing.

The financial market’s pressure on the euro seems to be linked to the practise of quantitative easing. The Bank of Japan introduced it at the turn of the century, and the Federal Reserve and the Bank of England instituted it last year, but the European Central Bank (ECB) was dragging its feet, condemning it as unorthodox. The ECB has now adopted the principle (pending parliamentary approval in the member states), which means that quantitative easing has become the guarantee of ballooning budget deficits in the major monetary spheres, dollar, sterling, yen and euro. The four central banks are buying Treasury bonds in their respective currencies so as to maintain the high prices of the bonds and their low interest rates, thereby allowing governments to borrow more and more. Central banks regularly intervene on the currency market to stabilise exchange rates, often to no avail. Their interventions on the bond market have another dimension.

The governments of the majority world are currently borrowing 7/8% of GDP. These are vast sums that need an equally vast supply of willing lenders. But the lenders have realised the doubtful nature of the debts. After all, the governments are not spending these loans, and even less are they investing them. The borrowing is being used to pay back past debts, those of the Treasuries and those of the banks that governments have bailed out. Now borrowing for consumption or investment produces growth, whereas borrowing to pay back debts and their interests is just a Ponzi scheme. The lenders’ suspicions are justified.

Faced with the probability of soaring interest rates, government have called their central banks to the rescue. Quantitative easing is seen as a solution to the problem. Central banks buy and sell currencies to stabilise exchange rates. They can just as well buy and sell Treasury bonds to stabilise interest rates. Except that, when a nation’s currency is attacked, the central bank can only intervene if it has a stock of foreign currency to buy back its own currency on the market. And when the stock runs out, the intervention ceases automatically. Whereas Treasury bonds are labelled in the central bank’s own currency, and it can produce that in unlimited quantities. The ECB quite rightly considers this unorthodox. And the Germans, who are opposed to quantitative easing, have learnt in the past that printing money to pay for government debts does not lead to a brave new world. The rest of the world seems convinced that there is no alternative. Hopefully, Germany’s past experience will not repeat itself.