One of ESCWA's objectives is to monitor the global economic situation to assess how it affects the economies in the Arab region. Here is an example by one of our economists, on potential consequences of QE:
The burst of the 2007/8 credit bubble started a global crisis that many countries are still purging, especially in Europe. The most common strategy adopted by countries to restore the system has been to capitalize banks (e.g. remember the famous stress tests). The idea is that 'healthier' banks would lead to higher credit, which would reactivate the economy through investment: more people would have a job and hence would consume more, which in turn would lead to higher aggregate demand and higher prices. The most aggressive way to inject liquidity has been Quantitative Easing (QE), whereby the Central Bank buys securities from the main actors in an economy (e.g. bonds from Governments or financial institutions), which lowers the interest they'll have to pay on their debt, thus helping them to cleanse their balance sheets.
A vital priority of Central Banks is inflation: e.g. that of the European Central Bank is a rate close but below 2%. Last week we saw the month-to-month CPI figure in Europe: -0.1%. While this implies deflation we should be careful, for the core CPI (inflation without energy prices) was 0.9%, which means that the main cause of deflation is the super-low levels of oil price. Yet, such lower energy prices are endogenous (at least partially) because although the oil supply has indeed increased, demand is subsiding. We can see that while growth in developed markets is still very weak (the great exception is the US, with ultra-low interest rates but at quasi full employment), many emerging markets (e.g. Brazil, Russia, China, South Africa) are giving signs of fatigue.
Is expansionary monetary policy in the West failing? For instance, despite all the money pumped in by three rounds of QE during several years, month-to-month inflation in the US during August fell 0.1%. The key lies in the link between national policies such as QE and the global economic situation. In a global economy markets are global, which favors that businesses can take advantage of the possibility of borrowing in one country and investing in another (this is the very essence of arbitrage, which economists know well). This makes possible that, instead of working in the intended way (consumption-aggregate demand-inflation), money seems to be going elsewhere (and here we should remember that besides Central Banks it can be created by the private sector). But where is it going? At least two places have become visible:
One, we know it is going to large corporate operations, which is not really surprising: it is so cheap to borrow money that business can afford these operations even with low prospects of growth. Thus, the volume of mega deals in 2015 has hit an all-time record, surpassing even the dotcom boom and the credit-fuelled deals of the mid-2000s. In a way this may be considered as investment, the issue is that its link towards employment creation is at best, loose (for companies often lay off employees after such operations).
And two, money has gone to places that promised higher growth: as growth in the west is stagnant, investment has flowed to emerging markets, which seems to have favored a credit bubble in emerging markets (their liabilities are now twice the size of their equity). In the Arab region, banks’ liquidity has decreased substantially, especially in the Gulf - although this is also linked to oil prices. An excess of credit would not be negative if two conditions were met: first, that inflows are focused on real investments that lead to job creation (badly needed at a time when oil exporters are running out of oil revenues); and second, that capital doesn’t flow away as soon as the Fed raises interest rates (this is very important to avoid distress because at eventually credit cannot be repaid - remember the Asian financial crisis 1997). Hence, arguably both conditions are unmet (e.g. capital outflows from emerging markets may already be on the rise), which would explain why some analysts are turning increasingly pessimistic…
A vital priority of Central Banks is inflation: e.g. that of the European Central Bank is a rate close but below 2%. Last week we saw the month-to-month CPI figure in Europe: -0.1%. While this implies deflation we should be careful, for the core CPI (inflation without energy prices) was 0.9%, which means that the main cause of deflation is the super-low levels of oil price. Yet, such lower energy prices are endogenous (at least partially) because although the oil supply has indeed increased, demand is subsiding. We can see that while growth in developed markets is still very weak (the great exception is the US, with ultra-low interest rates but at quasi full employment), many emerging markets (e.g. Brazil, Russia, China, South Africa) are giving signs of fatigue.
Is expansionary monetary policy in the West failing? For instance, despite all the money pumped in by three rounds of QE during several years, month-to-month inflation in the US during August fell 0.1%. The key lies in the link between national policies such as QE and the global economic situation. In a global economy markets are global, which favors that businesses can take advantage of the possibility of borrowing in one country and investing in another (this is the very essence of arbitrage, which economists know well). This makes possible that, instead of working in the intended way (consumption-aggregate demand-inflation), money seems to be going elsewhere (and here we should remember that besides Central Banks it can be created by the private sector). But where is it going? At least two places have become visible:
One, we know it is going to large corporate operations, which is not really surprising: it is so cheap to borrow money that business can afford these operations even with low prospects of growth. Thus, the volume of mega deals in 2015 has hit an all-time record, surpassing even the dotcom boom and the credit-fuelled deals of the mid-2000s. In a way this may be considered as investment, the issue is that its link towards employment creation is at best, loose (for companies often lay off employees after such operations).
And two, money has gone to places that promised higher growth: as growth in the west is stagnant, investment has flowed to emerging markets, which seems to have favored a credit bubble in emerging markets (their liabilities are now twice the size of their equity). In the Arab region, banks’ liquidity has decreased substantially, especially in the Gulf - although this is also linked to oil prices. An excess of credit would not be negative if two conditions were met: first, that inflows are focused on real investments that lead to job creation (badly needed at a time when oil exporters are running out of oil revenues); and second, that capital doesn’t flow away as soon as the Fed raises interest rates (this is very important to avoid distress because at eventually credit cannot be repaid - remember the Asian financial crisis 1997). Hence, arguably both conditions are unmet (e.g. capital outflows from emerging markets may already be on the rise), which would explain why some analysts are turning increasingly pessimistic…
