It is evident that certain European countries are going nowhere
and fast, such as Greece and Ireland. But then again we are all part of a Union
and together as a whole one can only hope that we can more towards more evenly
dispersed prosperity.
To move forward, liquidity is needed. Cash is King.
While I recognise the inflationary and knock on effects associated
with the pumping of liquidity, It still remains the fact that liquid movement
is the blood of any economy. Without it, nothing can move on and recovery will
not happen. Measures such as quantitative easing are what’s needed.
Quantitative easing essentially increases the money supply by
flooding financial institutions with capital, in an effort to promote increased
lending and liquidity. It is a government monetary policy whereby government
securities such as bonds or other securities are bought from the market.
Quantitative easing is a drastic measure and can often be looked
at a last resort in the tackling of financial crisis and market downturns.
While quantitative easing can give economies that kick start
injection needed to get them functioning again, it is important to be aware of
the associated negative externalities or knock on effects. Despite the extra
money in the economy, the amount of goods and services for sale remains
unaltered and this inevitably results in
higher prices and increased inflation.
The IMF believe that the quantitative easing measures that were
adopted by central banks since 2000 have resulted in a reduction of systematic risks
following the collapse of the Lehman Brothers.
Here is an insight into the quantitative easing measures taken in
the UK:
In March 2009 the Bank of England pumped £75bn in the economy following dramatic a series of austerity
measures aimed at easing the credit crunch and encouraging the banks to lend again, that essentially didn’t work.
This was then reviewed later that year and further expanded to £200bn.
A
continued strain on lending and lack of liquidity in the UK market lead to
further QE measures in October 2011, the Bank announced a further £75bn to be
injected into the economy.
Most
recently, February 2012, this was once again extended by £50bn, bring the US to
a total quantitative easing programme of £325 billion, however the Bank
governor Mervyn King recently announced that he currently has no plans for any
further quantitative easing.
As we are all aware
Greece has agreed on a new round of austerity measures in exchange for another
bailout. To the dismay of Greek citizens, many EU ministers feel that these
measures aren't enough to keep the Greek economy afloat. German Chancellor
Angela Merkel has said that fiscal discipline is needed to keep the euro zone together
and she will maintain pressure on Greece to honour its debt-reducing promises
required for its second financial bailout.
But who is bearing the
brunt of this “fiscal discipline”? The ordinary tax payers like you and me.
While we have seen the
purpose for austerity measures, to raise needed capital, surely there is only
so much that can be squeezed out of the Greek people. Within this latest set of
measures there is a debt swap deal in which Greece will get €130bn loan, With
which they are required to pay out €100bn to bondholders (who have already seen
a 53% fall in value ). Seeing that Greece has already paid a vast amount of penal
interest on these bonds, it is difficult to understand why such an insolvent
country is still paying its bondholders half of face value, when in actual fact
they shouldn’t be receiving anything.
We can compare a “bubble”
to a child’s art of blowing bubbles, the bubble inflates until it can grow no
more and then BOOM (or should we say Bust), the bubble pops and we are left
with nothing. Putting this childlike comparison on austerity, we can look at it
as squeezing an orange. Once all the juice is squeezed from the orange, that’s
it, the juice you have in front of you is all you will get out of that orange.
So why are France and Germany insisting on squeezing all the life of Greece?
The negative externalities are seen is the riots on the streets of Athens (which
by the way are being controlled by the police force who are set for more pay
cuts), unemployment rates are at worrying levels and thus far, confidence has
not been restored in the Eurozone.
When looking at the wider economic picture
it is difficult to see how finance “experts” such as Luxembourg’s Prime
Minister Jean-Claude Juncker and head of the group of Eurozone finance ministers,
can be so confident about the Greek debt deal to say that it
“will preserve the financial stability of Greece”.
Is there even such a thing as “financial stability" anymore?
The following production of “Punk Economics” is an
illustrated set of opinions by Irish economist David Mc Williams and sets out
his views on EU measures in a contemporary form. (Warning: Content may cause
episodes of future economic worry viewers)
The first post in this blog series spoke of the trend of
many governments to put a “squeeze” on struggling economies instead of pumping
liquidity and giving them a chance to strive towards recovery.
Before moving on and looking at various governments measures
in relation to liquidity, I will briefly look at the elements up for discussion
here.
Firstly, the idea of liquidity, relates to the ability and the ease at which an asset
can be converted into cash. A previous economics and intrinsic valuations
lecturer of mine, Tom Power (DIT), drilled the notion that “Cash is King” into
my head throughout my undergraduate degree. And now looking at the global
economy over the last 5 years and the lack of cash circulating, I can clearly
see his viewpoint.
This lack of
liquidity, brings us on to explain austerity. Austerity measures are usually
taken by governments when they fail in their abilities to honour debt
liabilities. This widely topical process can involve a various range of
measures to cut budget deficits, including, tax increases, reduction in social
welfare payments, reduced spending etc. The overall aims of these measures are clearly
visible and understandable in most cases; the problems arise with their
associated negative externalities.
This week saw the
Greek parliament approved a set of austerity
measures to avoid a disastrous default and secure a second bailout from the EU
and IMF. In my next post I will consider
some of the negative externalities associated with this bill that sets out
to make cuts of €3.3bn in wages, pensions and job cuts for 2012 alone.
Fortunately or unfortunately,
see it as you please, the powers that be now seem to be of the realisation that
liquidity in the form of the €1 trillion cash injection by the European Central
Bank for the troubled Eurozone economy is what is needed to get the economy
moving again.
In the late 1980’ies Boston
experienced a property boom similar to that of Irelands in Celtic Tiger Era,
and like the Irish property boom, it crashed. The focus of this blog is not on
property or booms or busts, but on the paths taken by Governments towards
recovery. In the case of the Boston crash the path that followed seems to have
been similar to that of Robert Frost, “the
one less travelled”. Here the Federal Reserve employed a fiscal union of
pumping liquidity into the economy; the unemployed received more federal transfers
and paid fewer taxes to the American government. This is how I understand good
fiscal policies to work; in the good times; successful regions pay more (because
they can afford more) and in recessionary times they receive more, giving the
struggling depressed region the opportunity to recover. Of course this theory is easy to understand,
because let’s face it, it’s not complicated. So why are governments and the powers that be making things so complicated?
Instead of following basic instincts, to help in times of a crisis
(i.e. in Finance terms inject liquidity when needed), European nations have been
choked by austerity measures. Ireland has had austerity for three years now,
similarly is the case with Greece and look at where there are now. The German-style
fiscal union has thus far been punishing these depressed nations with the
result that confidence in the Euro has been slipping and we are surrounded by
market uncertainty.
This blog aims to look at whether liquidity is the answer to the
banking and financial crisis and over the next few weeks I will be considering the
pros and cons of the current fiscal policies being adapted in the European
Union and I intend to look at measures such as austerity and quantitative easing their roles a functioning economy.
