Quantitative easing may finally be on its way out. At least that’s what we can gather from the latest World Economic Forum held in Davos, Switzerland this past January. The summit’s executive summary stated that given transformations and advancements in politics, economics, and technology, it’s time to normalize monetary policy, and this will only come by scaling back quantitative easing.
For approximately the last seven years, fiscal policy in both the U.S. and abroad has largely centered on the policy of quantitative easing, which refers to the process of introducing new currency into a nation’s money supply through the purchase of assets like government securities. Quantitative easing is generally a policy used to lower interest rates during a time of economic hardship, which is why the Federal Reserve pursued three phases of quantitative easing shortly after the economic recession of 2008. Though their approach to quantitative easing has been highly controversial and the cause of the stock market’s misleading representation of the health of the economy, the Federal Reserve announced in the fall of 2014 that its October 15 billion dollar government bond purchase would be the last step in its quantitative easing policy.
According to Dawn J Bennett, financial money manager, CEO of Bennett Group Financial Services, and host of Financial Myth Busting with Dawn Bennett, though this international “agreement” to depart from quantitative easing is much needed, it won’t be easy for everyone.
The primary reason the international community can expect bumps along the road ahead? Europe isn’t ending quantitative easing—just yet. In fact, Europe’s Central Bank began purchasing additional assets (1.1 trillion euros) on March 1st, which means that even as philosophy about quantitative easing has sharply shifted, policy has yet to catch up. Here’s why it’s problematic:
- The European Central Bank has a limited number of assets it intends to purchase; these assets will come exclusively from the euro zone’s government bonds, while other futures contracts from the United States and Europe will not be pursued. A limited range of assets both heightens risk and limits the effectiveness of the policy.
- To avoid unfairly aiding certain countries (i.e., Greece), the European Central Bank will only purchase 33% of bonds from individual issuers. However, because Greece will likely demand more money from the Central Bank to climb out of its present financial crisis, and because the Central Bank is now only able to provide them with 1/3 of what they ask, there could be trouble brewing for all to the tune of a bank shutdown.
- The longer the EU pursues a policy of quantitative easing (as politicians determine which fiscal policy to pursue next), the weaker the euro becomes. A weak euro doesn’t put any future fiscal policy in a good starting position.
The fundamental differences that exist between the economic structures of the U.S. and the eurozone should also raise eyebrows about the practicality of the eurozone’s quantitative easing policy. Whereas the U.S. was able to benefit from being pushed into pursuing riskier assets like corporate bonds, the eurozone is far more dependent upon its banks, which means that there will be less benefit to an increase in its capital market.
As the eurozone’s quantitative easing process gets underway, we can only watch as what the leaders at Davos herald to be unsuitable economic policy weakens the European economy.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett firstname.lastname@example.org