Eurozone’s QE intensifies currency wars

Last Wednesday’s announcement that the Swedish central bank, the Riksbank, was cutting rates even further was referred to as a "bomb" and a "panic measure" by economists and business magazines. The decision came only ten days after the European Central Bank started its Quantitative Easing (increasing liquidity by buying bonds), aggravating an ongoing war between currencies and interest rates.

This year alone, over 20 countries’ central banks have lowered their interest rates. These include Denmark, Canada, Israel, China, Thailand, India, Russia, Chile and Australia. All with the aim to drive down the value of their currencies.

Lowering the value of the currency is aimed at boosting economic growth. The hope is that this will be achieved by increased exports when the currency falls, and by averting deflation, ie falling prices. If the value of the currency falls, the prices of imports increases and with it inflation.

The Swedish Riksbank for a long time refused to lower interest rates. It argued lower rates would fuel finance, debt and housing bubbles further. In October, however, the bank made a 180 degree turn by introducing zero interest rates. In February, rates became negative - minus 0.1 percent - and on 18 March minus 0.25 percent.

The main reason for the latest step was the rise of the Krona (SEK) because of the ECB’s Quantitative Easing since 9 March. This has particularly worried the export industry, with thousands of job redundancies announced last week. Now, the Krona fell again on Wednesday, by more than 2 percent against the euro.

Negative interest rates is the latest, but not final, measure taken by central banks in order to get the economy moving again. The Economist commented: “Economists have long assumed that, in practice, it would be impossible to send nominal rates below the ‘zero lower boundary’ (...) But such is the seriousness of the situation that some central bankers are now willing to give negative rates a shot.”

"You can stand on your head to understand what negative interest rates means", commented Robert Bergqvist, chief economist at the Swedish bank SEB about the decision in February. Tor Borg, chief economist at major building society, SBAB, commented on Wednesday’s move that Denmark has had negative interest rates since 2012, Sweden and Switzerland have now joined it. The ECB formally has a benchmark interest rate of 0.05 percent. But since last year it has introduced a negative interest rate for banks depositing capital with the ECB. First, this was -0.1 percent, and then it was raised to -0.2.

The idea is that the negative interest rates will further encourage banks to increase lending. However, in Denmark, no such effect has been measured. And in the eurozone, lending decreased in the second half of last year, after the negative interest rates were announced.

Fear of deflation

Behind the lowering of interest rates is the fear of deflation. Both the US and the eurozone have seen falling prices in the past year, amplified by the oil price being halved. In Sweden, prices also dropped from December 2013 to December 2014.

The ECB recently revised down its own forecast of 0.7 percent inflation for this year to zero. The Bank no longer believes that inflation over the next three years will reach its own target of ’below, but close to two percent’.

Deflation is a danger signal of a downward spiral for the economy, with investment and consumption postponed, production declining and unemployment rising.

Falling prices makes debt more expensive. The real interest rates are namely the official interest rate minus inflation. So if the interest rate is one percent and inflation two percent, the real interest rate is minus one percent. But if interest rates remain at one percent and inflation is -0.5, the real interest rate is plus 1.5 percent.

The warning example is how deflation has become entrenched in Japan for two decades. Japan is currently the country with the largest sovereign debt compared to GDP and without growth yet returning.

“Red hot” stock market

The second winner of Wednesday’s announcement was the stock market, which increased by one percent in 15 minutes. With a rise of a third since October the stock market has been described as "red hot” by speculators and analysts.

Just like the US, the major effect of QE is seen on stock exchanges. "Interest in European equities has rarely been greater than it is today," said Sweden’s largest stock broker, Avanza. The Dax index on Germany’s Frankfurt stock exchange rose 24 percent from January to mid-March. The Avanza columnist, however, also noted that there is no corresponding increase in demand for industrial goods.

The stated purpose of the Swedish decision was to "make monetary policy more expansive," according to the Riksbank in a press release. With most governments following policies that restrain growth, the role of the central banks is to stimulate banks and speculators, “investors”. While there is "no money" to meet the real needs in society, there is always plenty for the financial world.

In line with this, the Swedish Riksbank declared the rate cut will remain until at least the second half of 2016. It also expands the previously decided purchases of government bonds by 30 billion, double the decision from February. More measures are also in the pipeline, for example, more support for banks that lend to businesses.

However, Sweden’s ability to stand up to the ECB and the EU in a war of interest rates and currencies is clearly limited. Any gains from the recent intensification measures of the Riksbank can only be short-lived. Instead, mortgage and other loan bubbles are being blown up further. The desperation of Riksbank Governor, Ingves, is based on an uncertainty that will only increase after these recent announcements.

Any solution?

The effects of the central banks’ quantitative easing (QE) are controversial, even among capitalist economists. In the US, QE was implemented in three instalments over nearly six years, from 2008 to 2014. The Federal Reserve bought bonds for a total of 4.5 trillion dollars. The Bank of England and Bank of Japan also implemented aggressive QE measures, of which the Japanese are still ongoing and increasing.

These enormous amounts have increased the money supply in the world. Financial markets in countries such as India and the stock exchanges in many countries have benefited, and huge capital reserves have been built up at banks and corporations. One of the consequences of the Fed ending its QE last autumn is an escalation of the currency and interest rate war.

The ECB’s quantitative easing, which has just begun, includes 60 billion euros a month for almost two years, a total of EUR 1.1 trillion. The ECB will buy government bonds from all countries in the eurozone, except Greece and Cyprus, underlining the pressure of European capitalism on these countries. The purchases must be made on the "market" - i.e. from banks and finance companies, not directly from governments.

The idea from those who advocate QE and low or negative interest rates is that extra capital will be used for investment and growth. In reality, despite negative interest rates banks have chosen to continue to deposit their capital at central banks. This is because other options are seen as worse. There is no great demand for capital for productive investment. The Economist estimates that excess reserves in the eurozone rose from 1.8 billion euros in 2008 to 158 billion in 2013. With the ECB’s QE this sum will now grow even faster, similar to the US, which has an estimated 2.6 trillion dollars in excess reserves.

The Bank for International Settlements (BIS) in Switzerland, which oversees central banks, warns that continued low interest rates and inflation could push the boundaries of "economic and political stability" closer to breaking point.

The BIS suggests that this economic policy, which has never been tried before, has already led to deficits for many pension funds and lower profits for the banks. In Denmark, some banks have already introduced a negative interest rate even for ordinary saving accounts. The Economist also says that institutions in the financial markets are being weakened as a result, further reducing opportunities to boost the economy.

Seven years since the start of the Great Recession there has been no real recovery. Instead of real growth, financial bubbles are increasing again, while currency and interest rate wars are increasing the contradictions. That capitalism as a system can not find a way forward becomes clear to more and more people. Anti-capitalist sentiments will increase, as will the search for a genuine, socialist alternative.

Committee for a workers' International publications


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