The European Central Bank (ECB) announced on Thursday that it would leave its target rates unchanged, while also standing pat on its monetary inflation.
The ECB is purchasing assets of 80 billion euros (about $90 billion) per month, which is expected to last at least through March 2017. The ECB is trying to top the Federal Reserve’s QE3, which ended in October 2014. At the peak of QE3, the Fed was buying $85 billion per month in assets.
In terms of quantitative easing by major central banks, Japan may be the biggest winner of them all. As the Fed finished up QE3, the Bank of Japan ramped up its monetary inflation, buying 80 trillion yen per year. This currently equates to around $780 billion per year. This is lower than the Fed’s $1 trillion in 2014, but consider that Japan’s GDP is about one-quarter that of the United States.
Despite the ECB’s continued program of asset purchases (digital money printing), investors were disappointed that the central bank isn’t being more aggressive. In a world of negative interest rates and massive monetary inflation, investors still want more.
The ECB is going to continue on its path. If the economic conditions in Europe don’t improve, we can be rather sure that the ECB will continue its program beyond March of 2017. Why would they announce it now when they can just wait until later? It will be easier to find excuses later to continue the monetary inflation.
It is similar to the Fed’s strategy of raising the federal funds rate. Fed officials keep saying it is on the table, but there is always a new excuse when the next time arrives.
Even though the Fed isn’t raising its target rate, other than the one quarter percent last December, it still has the sanest policy of all of the major central banks. The Fed has actually kept the monetary base relatively stable for nearly two years now.
The economies in Japan and most of Western Europe are already far weaker than that of the United States. The U.S. economy has a bigger chance of weakening in the short run because of central bank policy. The relatively tight policy could expose the malinvestments from the previous Fed stimulus.
On the other hand, Japan and Europe could fall much harder. They have copied the Fed’s insane policy from 2008 to 2014. But the ECB and Bank of Japan have stepped it up beyond what most of us would have thought was possible.
The massive monetary inflation is unsustainable. It may not seem like it now, but this cannot go on forever without seeing some serious consequences. We will either see a scenario of massive price inflation, or we will see a big depression. It could even be a combination of both for a while.
Americans should hope that Japan and Europe implode first. As more Americans learn that the Fed is part of the problem and not the solution, we can hope that public pressure will prevent us from going down a path similar to Japan.
The inflation and debt in the U.S. have been massive, but it is still nothing compared to Japan.