by Janssen Ronald

Following up on yesterday’s warning by the @OECD that growth is flat lining and stagnating at the slowest pace in five years, the Financial Times comes out with the message that central bankers, in particular the European Central Bank, are coming to the rescue. In particular, Mario Draghi seems to have obtained the backing from the ECB’s governing council for tougher monetary policy action, to be decided in March. Indeed, the financial market place is already buzzing with ideas such as driving interest rates on excess reserves that banks are holding with the central bank even further below zero , extending and increasing the monthly purchase program or even buying up bank and corporate bonds.

The key question however is whether quantitative easing, in the form it is being undertaken at this moment, is really effective in injecting the new aggregate demand the economy so urgently needs.

The recent UN World Economic Situation Prospects report points to the fact that most of the additional money printed by the Federal Reserve was not being used to finance new demand in the economy. Instead, it simply returned to the coffers of the central bank itself. This can be seen in Graph I, showing that the deposits (‘excess reserves’) the US financial system is holding with the Federal Reserve exploded, at the same time as the Fed was flooding the system with liquidity, from an average of $200 bn during 2000–2008 to $2.6 trillion at the end of 2015. Joseph Stiglitz (http://www.theguardian.com/business/2016/feb/08/whats-holding-back-world-economy-joseph-e-stiglitz?CMP=Share_iOSApp_Other) adds the reflection that, since the FED is paying (positive) interest rates on these excess reserves, this actually amounts to a largely hidden but generous subsidy from the Fed to the financial sector, a subsidy which he estimates to be around $ 30 bn on average during the last five years.


How are things looking in the Euro area?

… Not much different it seems. When we look at deposits of the euro area banking system with the ECB (Graph II), a similar picture appears. Bank deposits with the ECB goup at the same moment, the ECB is printing money (in a first period through the so called LTRO’s, long term repurchase operations), and subsequently go down when that source of liquidity for banks dries up but shoot up again when, at the start of 2015, quantitative easing in its more pure form finally arrived in the euro area.


There is more

With banks in the euro area not using part of the additional money printed by the ECB, a parallel development appears at the level of the non-financial business sector, where corporate deposits in the euro area banking system have gone from 1,4 trillion at the start of the crisis to 2.2 trillion euro (see Graph III). Within the euro area corporate sector as well, a lot of finance is lying around but is not being used for investment.


Source: http://cib.natixis.com/flushdoc.aspx?id=89560

All of this should make policy makers raise a number of key questions:

What’s the use of massively printing money, when markets are free to decide what to do with that money and are de facto not channelling a large part of that liquidity into riskless savings and little of it into the real economy?

What’s the purpose of pampering businesses (the slogans are well known: “flexibility for business”, “competitive business”, “friendly or enabling business environment”), when business is increasing profitability and profit margins but is directing those profits into financial savings and not so much into real investment and new jobs ?

In the end, Joseph Stiglitz is absolutely right when he writes that “the rules of the market need to be rewritten”. Handling the money printing press machine should not be left to monetary policy makers alone. In order for new finance to be made available for higher effective demand in the form of additional public investment, fiscal policy makers also have their part to play.