The Fed and the ECB: The Double Mistake
Published in Le Monde
(France) on 29 November 2010
by Nicolas Baverez (link to original)
(France) on 29 November 2010
by Nicolas Baverez (link to original)
Translated from
by Mylène Perdreau.
Edited by Gillian Palmer.
The American Federal Reserve (The Fed) and the European Central Bank (ECB) are following completely divergent strategies.
The Fed is confronted with decreasing inflation down to 1 percent and with unemployment becoming permanent (at the stable rate of 9.6 percent in October, of which 48 percent was long-lasting unemployment), two factors the Fed thinks lead to deflation. So it has started to create money in any way possible: through less pressure on long-term interest rates, dollar devaluation, and issuing more money in order to maintain the Bush-era tax cuts.
The ECB is confronted with the collapse of the recovery and an endangered Euro. So it lets events take their course and normalizes the extraordinary measures that have been applied on interest rates and liquid assets since 2008.
The Fed started a "quantitative easing" program of $600 billion (€427 billion) in order to purchase assets by mid 2011. It will then be the possessor of a portfolio of assets that will be the equivalent of 17 percent of the U.S. Gross Domestic Product (GDP), making it the greatest possessor of American securities in the world.
This program is useless.
Considering the demographics, the scope of the 2009 stimulus package, the structure and market participants’ flexibilities, there is no risk of deflation in the U.S. With 1 million new jobs on the market since the end of 2009, salary increases, longer working hours, increased investments and household debt reduction — between 130 and 140 percent of the available revenue — an upturn in the economy is underway.
This program is inefficient. Pouring money in will not have any effect on the real economy and competitiveness. It is going to cause economic bubbles and create inflation similar to what happened in the early 1970s, when the money supply doubled between 1968 and 1972.
This program is dangerous. The Fed is risking triggering a crash of the dollar. The competitive devaluation, similar to the one carried out by Roosevelt in 1933, will be devastating for global trade and payments.
Because they are facing revaluation of their currencies — which reached 40 percent for the Brazilian Real — the emerging countries are increasing the number of protectionist measures, capital controls (in Indonesia, Korea, Brazil and Thailand) and measures to counter currency manipulations. The Central Bank of the Republic of China increased its required reserve ratio in order to maintain the Yuan's parity.
Conversely, the ECB does not react while the Eurozone is imploding.
Unlike in the U.S., deflation is possible for Europe — except for Germany — which is accumulating declining demographics, sluggish growth, massive unemployment, excessive debt and a lack of competitiveness.
The overvaluation of the Euro makes Europe the reference for further adjustments in order to get a global economic recovery. And finally, the Eurozone economies are diverging while Greece, Ireland and Portugal — the Eurozone periphery — will not be able to avoid debt restructuring.
As danger grows, the ECB pursues a restrictive monetary policy, refuses to lower interest rates to 0 percent and strictly limits quantitative measures (€60 billion).
Monetary restraint is added to financial restraint and this leads the continent to deflation. It results in an absurd overvaluation of the Euro that drives banking systems and the most fragile countries into failure.
So Europe establishes itself as the sick person of the world economy because of inadequate institutions and monetary strategies.
Though they are antagonists, the Fed and the ECB's strategies show a common irresponsibility: They are governed by ideology instead of economic reason.
The Fed wants to revive the economy and employment in the United States — even if it means returning to an economy of bubbles and encouraging protectionism — while the EBC amplifies the Eurozone’s internal tensions. They both intensify the globalization's structural imbalances as well as nations' and central banks' risks of bankruptcy.
The Fed and the ECB have a great responsibility in the monetary policy mistakes and regulatory failures that led to the global crisis.
Far from learning their lesson, they make even more mistakes. The price to pay, already high, will soar: Sluggish growth and inflation in the U.S., neither growth or inflation in Europe and protectionism all over the world.
The Fed is confronted with decreasing inflation down to 1 percent and with unemployment becoming permanent (at the stable rate of 9.6 percent in October, of which 48 percent was long-lasting unemployment), two factors the Fed thinks lead to deflation. So it has started to create money in any way possible: through less pressure on long-term interest rates, dollar devaluation, and issuing more money in order to maintain the Bush-era tax cuts.
The ECB is confronted with the collapse of the recovery and an endangered Euro. So it lets events take their course and normalizes the extraordinary measures that have been applied on interest rates and liquid assets since 2008.
The Fed started a "quantitative easing" program of $600 billion (€427 billion) in order to purchase assets by mid 2011. It will then be the possessor of a portfolio of assets that will be the equivalent of 17 percent of the U.S. Gross Domestic Product (GDP), making it the greatest possessor of American securities in the world.
This program is useless.
Considering the demographics, the scope of the 2009 stimulus package, the structure and market participants’ flexibilities, there is no risk of deflation in the U.S. With 1 million new jobs on the market since the end of 2009, salary increases, longer working hours, increased investments and household debt reduction — between 130 and 140 percent of the available revenue — an upturn in the economy is underway.
This program is inefficient. Pouring money in will not have any effect on the real economy and competitiveness. It is going to cause economic bubbles and create inflation similar to what happened in the early 1970s, when the money supply doubled between 1968 and 1972.
This program is dangerous. The Fed is risking triggering a crash of the dollar. The competitive devaluation, similar to the one carried out by Roosevelt in 1933, will be devastating for global trade and payments.
Because they are facing revaluation of their currencies — which reached 40 percent for the Brazilian Real — the emerging countries are increasing the number of protectionist measures, capital controls (in Indonesia, Korea, Brazil and Thailand) and measures to counter currency manipulations. The Central Bank of the Republic of China increased its required reserve ratio in order to maintain the Yuan's parity.
Conversely, the ECB does not react while the Eurozone is imploding.
Unlike in the U.S., deflation is possible for Europe — except for Germany — which is accumulating declining demographics, sluggish growth, massive unemployment, excessive debt and a lack of competitiveness.
The overvaluation of the Euro makes Europe the reference for further adjustments in order to get a global economic recovery. And finally, the Eurozone economies are diverging while Greece, Ireland and Portugal — the Eurozone periphery — will not be able to avoid debt restructuring.
As danger grows, the ECB pursues a restrictive monetary policy, refuses to lower interest rates to 0 percent and strictly limits quantitative measures (€60 billion).
Monetary restraint is added to financial restraint and this leads the continent to deflation. It results in an absurd overvaluation of the Euro that drives banking systems and the most fragile countries into failure.
So Europe establishes itself as the sick person of the world economy because of inadequate institutions and monetary strategies.
Though they are antagonists, the Fed and the ECB's strategies show a common irresponsibility: They are governed by ideology instead of economic reason.
The Fed wants to revive the economy and employment in the United States — even if it means returning to an economy of bubbles and encouraging protectionism — while the EBC amplifies the Eurozone’s internal tensions. They both intensify the globalization's structural imbalances as well as nations' and central banks' risks of bankruptcy.
The Fed and the ECB have a great responsibility in the monetary policy mistakes and regulatory failures that led to the global crisis.
Far from learning their lesson, they make even more mistakes. The price to pay, already high, will soar: Sluggish growth and inflation in the U.S., neither growth or inflation in Europe and protectionism all over the world.
Next article![]( "Information Released by WikiLeaks: Much Ado about Nothing")
