|The Federal Reserve: The Biggest Scam In History (Photo credit: CityGypsy11)|
The reason is simple and everyone knows it (including economists): quantitative easing. That's what the Federal Reserve has been doing - and done twice since 2008, spending hundreds of billions of $$$ to buy bonds (Treasury bills) thus automatically pumping money in the economy and helping to jumpstart it. And that's what the European Central Bank (ECB) has NOT done - or done very little of it: just €212 billion (some $ 260 billion).
Peanuts compared to the Fed!
So it should come as no surprise that the crisis in Europe has lingered on, indeed has grown explosively while things in America are looking (a little) better - and it might go on this way provided the whole world (and international trade) is not taken down by a European implosion...Not to mention the other four reasons threatening the world economy according to Mr. Doom (see the first article below about Nouriel Roubini's predictions - all frighteningly likely).
|English: Nouriel Roubini, Turkish economist, professor of economics at the Stern School of Business, New York University. From the Confederation of Norwegian Enterprise conference, 2009. (Photo credit: Wikipedia)|
This is also why the IMF, in a recent report highly critical of the Eurozone policies, called on establishing a stronger monetary union to break the tide stemming from what it diplomatically described as the "adverse links between sovereigns, banks and the real economy" that have grown "stronger than ever". It warned of an economic slow down accompanied by a high risk of deflation (25% by 2014), and told the ECB to engage in quantitative easing or else...
What's this business of "adverse links"? Put in simple words: European government finance their deficits with bonds (what the IMF calls "sovereigns") that are snapped up by banks (lately national banks rather than foreign) that finance themselves from the ECB at super low interest rates (less than one percent). Thus they are able to fill up with bonds that give them returns many times higher (in the 6% area and more) than the cost of the money they borrowed. And they do this rather than lend to local businesses ("the real economy"): it's a sure way to fill their coffers and achieve the reserve levels required of them by European regulators.
In short, a vicious circle.
Quantitative easing, since it turns the Central Bank into a major bond buyer, can break the said vicious circle. Banks will find the Central Bank is competing with them, hence, with more buyers in the bond market, rates on bonds will inevitably drop and become less enticing. That will force them to turn elsewhere to make money and (hopefully) start lending to business, which is what they really should have been doing all along.
But quantitative easing makes people uneasy and fiscal disciplinarians (like the Germans and the Republican Tea Party) downright furious. They see it as reckless pumping of money that causes inflation - for them, it's a scam, it's immoral, it's something that destroys the future of our children. Moreover when the ECB was established, it was meant to fight inflation, not deflation.
So will the ECB listen to the IMF's advice?
|LONDON, ENGLAND - MAY 22: Christine Lagarde, the Managing Director of the International Monetary Fund, addresses a press conference in the Treasury on May 22, 2012 in London, England. A report on the IMF's annual assessment of the UK economy has recommended that the Treasury consider measures to improve its current economic weakness such as Quantitative Easing and cutting interest rates. (Image credit: Getty Images via @daylife)|
But there's something else at work here: the ECB is also mandated to defend the stability of the Euro - thus if prices will slow down significantly, as they may well do, particularly in the so-called European southern periphery (read: Greece, Italy, Spain etc), the ECB may well have to engage in quantitative easing, whether it likes to or not.
Because worse than inflation is deflation: when consumer prices fall, investment prospects collapse, sales slow down, businesses close down and unemployment soars. Whatever advantage to the consumer may derive from lower prices simply evaporates.
Which brings me to my last point: sovereign debt is NOT the equivalent of a private household debt - whatever the Germans and the Tea Party say. There's no moral payback for keeping it in balance year in, year out. To think of it that way is wrong. But to never balance the budget is also wrong. You should be a fiscal disciplinarian in good times, not in bad times. When things are going well, that's when you should call on governments to balance their budget. Otherwise no. It's the government's role to ensure stability of the currency and limit economic downturns and the pain of unemployment.