January 23, 2015
Does this week feel like a prompt about turn?
The announcement this week of QE for the eurozone seems to suggest that all those years of pain to bring budgets and debt levels down were not worth it.
“We tried spending and borrowing less, though borrowing still went up, so now we are going to try borrowing even more“.
Obviously the experience of the United States has been a guide. After the financial crisis of 2008 the US got those printing presses rolling and despite all the obvious fears of inflation and the debt ceiling, the American economy is growing and unemployment is falling.
In contrast, all that austerity has caused mayhem and suffering in the European periphery. There is every chance that the Greek government and existing two party system will be overthrown in the elections this weekend, suggesting that the EU still has a very long way to go to recover politically.
That, of course, presumes that Europe can recover politically from this. My guess is that it cannot.
Back in July 2009 I made a prediction on this blog that the recession would last until 2016. At the time, politicians and talking heads on the news channels were suggesting that things were settling down and recovery was on the way.
Now that the years have passed and 2016 is rapidly approaching, this is looking much more like a lost decade for Europe. With QE being a new twist in the plot and the French and Italian economies still worsening, the eurozone crisis has a long way still to travel.
Something tells me however, that Europe cannot copy the American experience.
One of the more obvious results of QE in America has been the sharp rise in the stock market. I am proud to say that I called it in March 2013. The result of all that cheap money and low wage pressure made it a great time to be a stock holder in US assets.
It is very difficult to imagine the same thing happening in Europe in the near term though. The depths of the recessions and depressions underway have been too long and too deep for a sudden bounding recovery of markets.
It is also worth asking just who might benefit. Since this week has been Davos week, the press has been running its usual one week per year look at the 1% and the wealth gap between rich and poor. As has now been well demonstrated, cheap money looking for a home benefits asset prices and assets are generally owned by people with existing wealth – not the poor. The rich getting richer.
Something tells me that after years of unemployment, the average 25 year old Spaniard, Cypriot, Greek or Italian will not be one to see a rise in their net worth because of QE fueled asset purchases.
I fear that the results of QE in the eurozone will be very different to QE in the United States.financialguy