Past Quantitative Easing measures enacted by the Bank of Japan (BOJ), Bank of England (BOE), The Federal Reserve Bank (FED) and The European Central Bank (ECB) have mostly accomplished their stated objectives of injecting global liquidity, lowering real interest rates for sovereign states, businesses and consumers alike while inflating all asset classes and investor portfolio values.
However QE has not lifted inflation expectation as predicted and there has been growing concerns of its effects on wealth disparity between the upper and lower classes of society. States have conducted QE in their own best self interest and in varying global business cycle, thus its effectiveness has been unevenly distributed.
If these 4 central banks had done Quantitative Easing at the same time then currency volatility would not have been a issue and their valuations would have remained relatively stable as they did the heavy lifting of their respective economies in mutual coordination.
Mr. Draghi, president of of the ECB has called for a coordinated approach from Central Banks in implementing further stimulus measures to address the current economic dilemma of deflation and negative interest rates. This dilemma has unleashed a vicious cycle of low demand and productivity with no end in sight to slow growth, falling business investments and confidence.
The Federal Reserve Bank has not been able to raise inflation to the normal level of a healthy functioning economy 8 years after its QE program begun and 2 years after it ended. 2 other major central banks (BOJ and ECB) are still continuing with QE programs and the BOE just served notice of additional stimulus easing to come as a result of the Brexit vote. The BOE was well within its jurisdiction to calm markets volatility with this early warning to investors and businesses. However this new stimulus has thrown the FED completely off course on its planned timing of future rate increases for 2016 and beyond.
Inflation expectations have turned further down and negative interest rates are becoming stubbornly ingrained in financial markets worldwide with $11,7 trillion worth of sovereign bonds in negative rates territory.
Banks are paying the price for negative interest rates as they can only sustain healthy profit margins by lending in a positive rate environment. With the banks balance sheets severely weakened, a whole sector of the economy is under-performing. A sector that is crucial to the economic well being of the world economy. Not only are banks weak but their very survival are at stake. A phenomenon unseen by policy makers as one of the crucial negative side effects of QE.
Now with the onset of deflation, QE is keeping interest rates negative for too long creating the very conditions to which the FEDs have been unable to normalize rates.
Bank of England’s (BOE) Governor Mr. Mark Carney has promised new stimulus measures to counterbalance the repercussions of the Brexit vote. The question now posed to economists and intellectuals alike is, ‘What kind of stimulus will deliver the desired results of boosting demand and productivity thereby lifting inflation not just for the state enacting stimulus but for the global economy as a whole?’
Most in the lower to middle working class as well as the elite class readily admit that QE along with its many positive effects is foremost a financing tool for heavily indebted economies to deal with their mountains of debt obligations. Its first use at the beginning of the crisis was to console investors that sovereigns could effectively manage their finances. Without QE, Japan, Europe, England and the U.S.A. would have real difficultly financing their bond debentures. One only needs to look at Japan (a sovereign with plus 230% debt to GDP) where the government has printed approx. 85 percent of it’s debt and continues printing approx $60 B per month.
While there has been efforts to conceal this fact by the FED with their purchases being primarily in the secondarily bond market and not directly from the Treasury (This would have been seen as blatant debt financing) or the ECB not buying any more that 20 percent of any particular sovereign state bond in order not to be able to trigger bankruptcy proceedings in the case of an approaching sovereign default. These maneuvers have not gone unnoticed to the working classes who are not blind to the financial manipulations of the elitist class.
Nor has the benefits of QE been equally apportioned to the varying classes with the elite and financial upper classes reaping a disproportionate share of its rewards and benefits.
In light of this negative interest rate dilemma, the Bank of England promised new stimulus’s should not even begin to consider lowering the inter-bank lending rate of 0,5 percent. The BOE has done 375 billion pounds of QE while maintaining the current rate level of 0,5 percent. Further QE measures does not necessarily induce the BOE to lower this rate. With the pound falling 11 percent since the Brexit vote it will only be a matter of time before rising inflation begins to make its presence felt in the British economy.
The BOE’s newly promised stimulus comes with adverse effects primary for the FED. Dollar strength presenting an ever new ‘clear and present dangers’ scenario. The weakening of the American economy will ultimately pull the rest of the world economy down while triggering another crisis in emerging markets as their currencies weaken. This can only result in a renewed cycle of negative interest rates maneuvers as the FED will ultimately be sucked into another series of QE stimulus to counter the rising dollar while the U.S. Treasury finds it increasingly difficult to finance its massive debt portfolio in a weakening economy.
The BOE would experience the same difficulty as the FED when it comes to increasing its base lending rate as their economy sputters. No doubt the ECB will experience the same difficulty when it begins normalizing rates, not to mention the ensuing volatility of financial markets at the very thought.
To address the concerns of wealth disparity of the lower working and upper classes of society, the indirect financing of debt to monarchies and sovereigns, the deadly spiral of negative interest rates and deflation, raising consumer demand, spending and fostering real job creation then Quantitative Easing should take an entirely different approach that puts wealth and prosperity directly into the hands of real people in the working classes.
What form of QE could address all of these concerns while lifting major world economies at an even kneel?
Why, the solution is staring us in the face. ‘Infrastructure spending and job creation.’
With an average worker’s pay and health benefits amounting to $50k, $1 billion could create 20,000 new jobs for one year. $51B would create 1 million 2 thousand new jobs distributed over the 50 states and the district of Columbia. Material costs for new bridges, highways, rail tracks, airports, new transportation methods, electrical grid, high speed cable and internet infrastructure, etc.,etc., would perhaps total anywhere from $800 B to $1 trillion. 25 percent of the $4T spent on the past 3 QE programs of the U.S.
With the U.S, Europe, England and Japan enacting this form of QE together, there should be negligible volatility in their currency valuations. Real interest rate will slowly begin turning upward as market expectations come to the realization that real growth were forth coming. Negative rates could truly be a thing of the past.
The working classes should participate primarily in the new jobs being created as programs should be enacted to benefit them as well as crash study courses to educate them to their new work functions.
The war in Iraq cost the government $2 to $3 Trillion. Is it not a war to put the worldwide economy back on a positive course? The cost of the new infrastructure spending would still be half to a third of the Iraqi war effort.
How could the FED, BOJ, BOE or ECB enact such a program while sticking to their strict mandate of full employment and stable inflation. How silly is this question when the very idea of an ‘Infrastructure Program’ goes to the very heart of the double mandate of full employment and stable inflation.
However duly noted, central banks mandates do not legally permit a role in such an endeavor. Congress has that power. Congress can and should enact legislation.
The Treasury could sell ‘Infrastructure Bonds’ on the primary market to prime financial institutions and banks whereby draining the financial system of its excess liquidity as inflation begins picking up steam. The FED could act as a backstop if needed, most likely in the beginning to lift off from negative rate by participation in secondary market purchases. There is more than $2 T in excess liquidity parked at the FED of which earn 0,5 percent interest from the FED. This would save the FED billions of dollars in annual expenditures to which should circulate back to the Treasury. These funds should be earmarked into a ledger account of ‘Infrastructure Bonds’ so that the $1 T program can be fully sanitized and not added to the public debt. Congress should enact exact legislature on how the amount would be financed to ensure the program’s success.
Apportioned taxes from employment and material costs of the ‘Infrastructure Program’ should specifically be coded and mandated back to the Treasury to repay the costs of the program. This would bring back approximately $300B in contributions to the Treasury.
Gross domestic product would likely increase ex-proportionately to the ‘Infrastructure Program’ as the general economy regains footing and grows in excess of plus 3 percent for the first time in a decade. The Federal Income Tax Act could be amended to create a small tax from all taxpayers from increased income taxes coming into the treasure from a 3% plus strong economy, to repay the remaining costs of the program. The majority of taxpayers would no doubt support such a measure.
Benefits of such a program will have long lasting effects on the American economy. The latest state of the art high tech infrastructures would lead to new found prosperity for all Americans. The financial and manufacturing industries (banks included) would experience a real boost worldwide. New and true wealth creation would lift all equity markets. This increased wealth would raise the nation’s GDP and intrinsic value as increased housing and auto sales came on board with many lower to middle class families participate in this new found prosperity.
A successful Quantitative Easing program would finally appeased its many critics and put more wealth back into the hands of the average person in the street.
If the four major Western economies here mentioned acted together in this endeavor, the results would be astounding. Many major economic distortions could become but mundane matters. The grizzly extrication of BREXIT would diminish in much the same way as Quebec independence referendums dissipated when the new found wealth and prosperity of the Canadian oil sands exploded onto the Canadian landscape.
Catalonia’s ambitions would more easily be absolved in a wealthier more prosperous Spain. German savers would again begin earning positive interest on their pension and savings.
European Union states accession referendums may be something of the past as this new found prosperity takes hold with wealth being more evenly distributed to its working class citizens.
And Americans would begin to see the light of day in their quest to balance their fiscal budget and perhaps see new possibilities in resolving their future Social Security and Medicare financing difficulties.
As new growth and prosperity takes hold in the Western world, China and Russia may become more motivated to pursue healthier relations with the West.