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Investment Gurus: What You Might Not Know About The ECB’s QE
Aspire, Thought Leaders | 10 February 2015
By: Lim Si Jie
Articles (169) Profile

ECB Chair Mario Draghi has promised €60 billion of asset purchases per month will continue at least until September 2016. This is in response to stalling growth in the euro zone and a negative inflation rate.

The market has long been prepared for the imminent QE measure, or so we thought. In wake of the recent European Central Bank (ECB) announcement to introduce quantitative easing (QE) measures to buy government bonds, the EURO fell to around $1.146 against the US dollar.

QE In The Eyes Of The ECB
The ECB believes that the move to introduce a new supply of EURO to markets was a pre-emptive action to prevent the Euro Zone from falling into a deflationary spiral. Deflation would have been a vicious circle that eventually leads to economic collapse and a rise in unemployment. 

In simpler terms, recession. But the question remains whether QE in EU would have the same positive effect as it did in the US.

Larry Summers: Fiscal Policy Needs To Complement QE

QE is supposed to drive down long term interest rates to spur economic growth. However, longer-term interest rates are already quite low in Europe. Interest rates were much higher in U.S. when the Federal Reserve first started buying bonds which increased the potential impact of QE.

The EU needs to be more creative with its fiscal policy. Summers reckons that Europe needs more direct stimulus spending by governments that are able to afford them, especially Germany (EU’s largest economy), in order to spur much needed economic growth.

George Soros: QE Creating Bubbles And Divergence

Soros, the legendary currency trader, has nothing but harsh words for EU’s QE. Soros warn that QE will “create bubbles” in the EU’s asset markets.

He holds the view that QE “will benefit the owners of assets and actually wages will remain under pressure through competition and unemployment”. The divergence between rich and poor will only become wider than it already is.

Interestingly, Soros also admits that EU needs to have the right balance of monetary and fiscal policy to go back to positive growth.

Art Cashin: QE Means Nothing More Than Weaker Euro

Bank lending needs to be stimulated in order for QE to be successful in EU. EU companies are now highly risk-averse and thus have cash holdings close to all-time highs. While demand and supply of loans has improved recently, the overall volume of lending remains low.

The reliance on QE to increase bank lending in Europe is “unlikely to happen” as opined by Art Cashin.

On top of that, Cashin is expecting deflation “to get stronger” as currencies fall. The only likely outcome of QE is clear to veteran trader Art Cashin: “Cheaper Euro”.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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