ECB QE. Much too late and not to be counted on.

That’s my view, and for a few reasons.

First, the impact of macroeconomic policies is partly about how they affect expectations.  The slow, drawn out, reluctant, piecemeal way that the ECB has handled the crisis so far [OMT excepted, that was just slow, drawn out and reluctant] and the disputes that have raged about whether and how to do QE in particular, mitigate to minimise the bang per buck.  ECB QE is to be contrasted in this way with the Fed’s QE3, or the latest bout of QE in Japan.  These were bold, determined policy changes with little of the current fog of controversy obscuring their likely effects, or the resolve of the policymaking bodies.

Second, in so far as QE works by signalling intentions about future central bank rates, there is now little to be got by way of a stimulus through this route.  On account of acting so late, the recession has driven guesses at what the ECB would normally do with rates down so that they deliver an almost flat yield curve.  Expectations of future rates can’t fall much further.

Third, in so far as QE acts through lowering term, liquidity or other premia, it’s too late for that too.  Something has squeezed those premia out in Northern countries.  And the risk that the remaining premia in the South reflect is not going to be taken off the local sovereign balance sheet.  If you are in the camp that believes that this risk is not anyway material, that is no great sacrifice.  But neither are there other great benefits to point to either.

There are some who will hang on to the view that EZ QE will bring about a huge increase in M.  [They no doubt hope for more than the 5% of GDP thus far expected].  And, they will reason, since of course MV=PT at all times, this means QE will lead to a healthy increase in P.  However, theory – which suggests that at the zero floor to interest rates a boundless increase in M will not affect P – and the experience of the BoJ, Fed and BoE, is not encouraging for those banking on the money channel.

The best that is to be said for EZ QE is that will probably do no harm, and is worth a shot.  Unless its labelling as ‘monetary socialism’ [Tweeted extract from German press, HT Mark Shieritz/Christian Odendahl] leads Northern politicians to redouble their opposition to good old fiscal ‘socialism’, which would, in fact, be a much better bet right now.

PS.  About size.  So I read supposed leaks that there is a proposal to do QE at 50bn a month.  At that rate it will take 10 months to get to 5% of EZ nominal GDP.  And therefore 60months=5 years to get to 30%, a stock of comparable size to that achieved by the Fed and the UK.  Which, in the case of the UK, has arguably not solved our [considerably milder] deflationary problems.  So even if you are a QE believer, don’t hold your breath.