Mario Draghi, the European Central Bank president, announced an asset-purchase programme worth around 1.1 trillion euros ($1.3 trillion), or 60bn euros a month until the end of 2016, on Thursday afternoon.
Here we explain the workings of QE, its track record, and its outlook as a restorative measure for Europe.
How does quantitative easing work?
Central banks buy assets from the open market including banks and dealers. Banks get cash, which they use to issue more credit. Companies take out more loans, spurring investment; consumers spend more on their credit cards. Banks place more money on the stock markets, since returns on equities are greater than the returns to cash. This benefits shareholders, who receive capital gains and higher dividend payments, and companies, whose higher stock prices increase their borrowing power. At least – that’s the theory.
Does it work?
QE may work. But many economists think that Europe could be in a balance-sheet recession – which would make further monetary easing ineffective. It is also thought that the ECB has waited for far
too long. When inflation gets close to zero, inflationary expectations change. When companies expect inflation to remain low, they do not significantly change their prices, which in turn keeps inflation low. This is how low inflation can become permanent.
What is a balance-sheet recession?
A balance-sheet recession occurs when high levels of private debt cause consumers and companies to focus on paying down or reducing debts, rather than increasing spending or investment. When net solvency (the assets of a company or household minus its liabilities) falls below zero, it is rational for that company or household to pay back debt no matter how cheap it becomes to take on additional liabilities. Japan entered a balance-sheet recession in the 1990s, when a collapse in land and stock prices dramatically increased firms’ net liabilities and reduced their net worth – leading them to try to pay down debt, despite interest rates falling below zero.
And this is the cure?
It is not clear that QE can solve the unique problems of balance-sheet recessions. When households and companies have negative net solvency, cheaper borrowing costs will not encourage them to increase lending. QE may allow borrowers to restructure the term and interest components of existing debt – but, by itself, that will not do a lot to get firms investing and consumers spending again. When net solvency is negative, actors will focus on returning to a neutral asset position. But with an economy in recession, this becomes harder to do – and chasing debt repayments at the aggregate level does nothing to boost the economy. The Nobel laureate Paul Krugman, and the economists Atif Milan and Amir Sufi in their book House of Debt, argue that debt relief and fiscal stimulus are crucial to addressing balance-sheet recessions – and that QE alone won’t do much.
Has QE worked in Japan, the UK and the US?
The evidence is mixed. It is clear that the accommodative monetary policy stance of central banks has worked better than the restrictive stance of the Federal Reserve during the last great crisis of financial intermediation – the Great Depression. This time around, we know that stock markets have benefited. The S&P 500 reached a record high on December 29, after a year of gains driven by all the extra cash the Fed gave to banks. But QE is an indirect way of stimulating the economy. Lifting the S&P 500 may not be the best way to encourage economic growth. Dividend payments and capital gains mainly benefit wealth-holders, and only very indirectly affect everyday consumers.
What is the ECB already doing?
The ECB currently buys private sector bonds for a period of three years. It also purchases asset-backed securities – products whose value changes based on the value of and income from the underlying asset, which are kept off-balance sheet – and covered bonds, which are asset backed securities kept on a bank’s balance sheet. QE would see the ECB buy sovereign debt.
What do the Germans think?
Germany has objected politically and legally to straightforward QE – which would result in the ECB itself buying up institutional debt. So, where the ECB would otherwise bear the risk of losses on sovereign debt on its own balance sheet, it is expected to ask national central banks to cover any losses on its purchase of the debt of their countries – the Bundesbank would be responsible for any losses on German sovereign debt, the Banque de France for any losses on French sovereign debt, and so on. German politicians argue that straightforward QE causes “moral hazard”. By effectively insuring governments against the consequences of their actions, governments feel free to engage in risky, profligate spending policies – or so German politicians argue.
Is everyone else on board?
No. The IMF has said that this is worse than straightforward QE, while the Irish finance minister, Michael Noonan, has strongly criticised the proposal. Periphery economies – Portugal, Italy, Spain – are at greater risk under this model. If investors believe that national central banks are simply propping up insolvent governments, sovereign debt crises could result. Investors might view nations as printing money to prop themselves or their companies up – and take flight. If the ECB were to buy bonds, by contrast, the solvency risk to the ECB would be shared among every euro zone member.
What will the impact be?
Limited. It may well be too late for the euro zone – economists have been calling for more action for a long time. Inflationary expectations are hard to shift: once ingrained, they can take years to change. And a nation-based QE scheme could backfire if it precipitated further sovereign wealth crises.
Is there an alternative?
Well, probably. Simon Wren-Lewis, a macroeconomist at Oxford University, says that direct transfers to citizens could be more effective than current examples of QE. On his blog, he argues that “in the short run the effectiveness of QE is highly uncertain compared to the effectiveness of direct transfers to citizens or public works. We seem to be stuck with an ineffective form of stimulus, because something more effective is taboo, or goes by a different name.
“To repeat it in a simple but more provocative way: a central bank giving money to people or governments is out of the question, but a central bank giving money to parts of the financial sector is just fine. That is a very convenient taboo for some.”
abouyamourn@thenational.ae
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DMZ facts
- The DMZ was created as a buffer after the 1950-53 Korean War.
- It runs 248 kilometers across the Korean Peninsula and is 4km wide.
- The zone is jointly overseen by the US-led United Nations Command and North Korea.
- It is littered with an estimated 2 million mines, tank traps, razor wire fences and guard posts.
- Donald Trump and Kim Jong-Un met at a building in Panmunjom, where an armistice was signed to stop the Korean War.
- Panmunjom is 52km north of the Korean capital Seoul and 147km south of Pyongyang, North Korea’s capital.
- Former US president Bill Clinton visited Panmunjom in 1993, while Ronald Reagan visited the DMZ in 1983, George W. Bush in 2002 and Barack Obama visited a nearby military camp in 2012.
- Mr Trump planned to visit in November 2017, but heavy fog that prevented his helicopter from landing.
Landfill in numbers
• Landfill gas is composed of 50 per cent methane
• Methane is 28 times more harmful than Co2 in terms of global warming
• 11 million total tonnes of waste are being generated annually in Abu Dhabi
• 18,000 tonnes per year of hazardous and medical waste is produced in Abu Dhabi emirate per year
• 20,000 litres of cooking oil produced in Abu Dhabi’s cafeterias and restaurants every day is thrown away
• 50 per cent of Abu Dhabi’s waste is from construction and demolition
The more serious side of specialty coffee
While the taste of beans and freshness of roast is paramount to the specialty coffee scene, so is sustainability and workers’ rights.
The bulk of genuine specialty coffee companies aim to improve on these elements in every stage of production via direct relationships with farmers. For instance, Mokha 1450 on Al Wasl Road strives to work predominantly with women-owned and -operated coffee organisations, including female farmers in the Sabree mountains of Yemen.
Because, as the boutique’s owner, Garfield Kerr, points out: “women represent over 90 per cent of the coffee value chain, but are woefully underrepresented in less than 10 per cent of ownership and management throughout the global coffee industry.”
One of the UAE’s largest suppliers of green (meaning not-yet-roasted) beans, Raw Coffee, is a founding member of the Partnership of Gender Equity, which aims to empower female coffee farmers and harvesters.
Also, globally, many companies have found the perfect way to recycle old coffee grounds: they create the perfect fertile soil in which to grow mushrooms.
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
Student Of The Year 2
Director: Punit Malhotra
Stars: Tiger Shroff, Tara Sutaria, Ananya Pandey, Aditya Seal
1.5 stars
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Some of Darwish's last words
"They see their tomorrows slipping out of their reach. And though it seems to them that everything outside this reality is heaven, yet they do not want to go to that heaven. They stay, because they are afflicted with hope." - Mahmoud Darwish, to attendees of the Palestine Festival of Literature, 2008
His life in brief: Born in a village near Galilee, he lived in exile for most of his life and started writing poetry after high school. He was arrested several times by Israel for what were deemed to be inciteful poems. Most of his work focused on the love and yearning for his homeland, and he was regarded the Palestinian poet of resistance. Over the course of his life, he published more than 30 poetry collections and books of prose, with his work translated into more than 20 languages. Many of his poems were set to music by Arab composers, most significantly Marcel Khalife. Darwish died on August 9, 2008 after undergoing heart surgery in the United States. He was later buried in Ramallah where a shrine was erected in his honour.
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
Specs
Engine: 51.5kW electric motor
Range: 400km
Power: 134bhp
Torque: 175Nm
Price: From Dh98,800
Available: Now
Company profile
Date started: 2015
Founder: John Tsioris and Ioanna Angelidaki
Based: Dubai
Sector: Online grocery delivery
Staff: 200
Funding: Undisclosed, but investors include the Jabbar Internet Group and Venture Friends
GOLF’S RAHMBO
- 5 wins in 22 months as pro
- Three wins in past 10 starts
- 45 pro starts worldwide: 5 wins, 17 top 5s
- Ranked 551th in world on debut, now No 4 (was No 2 earlier this year)
- 5th player in last 30 years to win 3 European Tour and 2 PGA Tour titles before age 24 (Woods, Garcia, McIlroy, Spieth)
COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
MATCH INFO
Quarter-finals
Saturday (all times UAE)
England v Australia, 11.15am
New Zealand v Ireland, 2.15pm
Sunday
Wales v France, 11.15am
Japan v South Africa, 2.15pm
How to wear a kandura
Dos
- Wear the right fabric for the right season and occasion
- Always ask for the dress code if you don’t know
- Wear a white kandura, white ghutra / shemagh (headwear) and black shoes for work
- Wear 100 per cent cotton under the kandura as most fabrics are polyester
Don’ts
- Wear hamdania for work, always wear a ghutra and agal
- Buy a kandura only based on how it feels; ask questions about the fabric and understand what you are buying
The smuggler
Eldarir had arrived at JFK in January 2020 with three suitcases, containing goods he valued at $300, when he was directed to a search area.
Officers found 41 gold artefacts among the bags, including amulets from a funerary set which prepared the deceased for the afterlife.
Also found was a cartouche of a Ptolemaic king on a relief that was originally part of a royal building or temple.
The largest single group of items found in Eldarir’s cases were 400 shabtis, or figurines.
Khouli conviction
Khouli smuggled items into the US by making false declarations to customs about the country of origin and value of the items.
According to Immigration and Customs Enforcement, he provided “false provenances which stated that [two] Egyptian antiquities were part of a collection assembled by Khouli's father in Israel in the 1960s” when in fact “Khouli acquired the Egyptian antiquities from other dealers”.
He was sentenced to one year of probation, six months of home confinement and 200 hours of community service in 2012 after admitting buying and smuggling Egyptian antiquities, including coffins, funerary boats and limestone figures.
For sale
A number of other items said to come from the collection of Ezeldeen Taha Eldarir are currently or recently for sale.
Their provenance is described in near identical terms as the British Museum shabti: bought from Salahaddin Sirmali, "authenticated and appraised" by Hossen Rashed, then imported to the US in 1948.
- An Egyptian Mummy mask dating from 700BC-30BC, is on offer for £11,807 ($15,275) online by a seller in Mexico
- A coffin lid dating back to 664BC-332BC was offered for sale by a Colorado-based art dealer, with a starting price of $65,000
- A shabti that was on sale through a Chicago-based coin dealer, dating from 1567BC-1085BC, is up for $1,950
UAE currency: the story behind the money in your pockets
Our Time Has Come
Alyssa Ayres, Oxford University Press
Manikarnika: The Queen of Jhansi
Director: Kangana Ranaut, Krish Jagarlamudi
Producer: Zee Studios, Kamal Jain
Cast: Kangana Ranaut, Ankita Lokhande, Danny Denzongpa, Atul Kulkarni
Rating: 2.5/5
SPEC%20SHEET%3A%20APPLE%20M3%20MACBOOK%20AIR%20(13%22)
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