Eurozone QE Re-Ignites Global Currency Wars

On January 22, 2015, European Central Bank chairman, Mario Draghi, planted a bomb in global financial markets. After much pushing and shoving by global bondholders, Draghi announced a Quantitative Easing (QE) program that will inject 60 billion euros a month, roughly equivalent to US$69 billion, over the next 18 months.

QE means the ECB and the Eurozone country member central banks will essentially print money and then buy bonds from investors, including government bonds, asset backed securities (ABS), and what are called ‘Coco’ or covered bonds in Europe. The Eurozone QE will inject about US$1.3 trillion into the Eurozone economy with the purchases, give or take a hundred billion dollars or so depending on how low the euro currency slides. Since many of the bondholders who will benefit nicely from the QE are outside the Eurozone, not all the money injection will actually go into the Eurozone economy – now hovering at or in its third recession since 2008-09 and now experiencing deflation as well.

The Eurozone’s US$1.3 trillion QE follows Japan’s 2013 US$1.7 trillion QE experiment, the UK’s US$600 billion QE, and the USA’s US$3.7 trillion. That’s more than US$7 trillion in printed money injections that flowed into the global economy in recent years to purchase financial assets only – an unprecedented massive injection of liquidity globally that has clearly failed so far to generate real growth, to stop the global slide to deflation, or to generate jobs or raise wage incomes. What QE has done is stimulate financial asset inflation and bubbles, accelerate capital income growth, and worsen global income inequality.

The QE bombshell just laid by Draghi will provide another big windfall for global bondholders. Bond prices in the Eurozone region, and throughout the world, immediately surged after the January 22 announcement. So did stocks, especially in Europe, but elsewhere globally as well. Other financial securities asset classes will no doubt benefit in the wake of the stock and bond surge nicely as well. So investors—especially the super-rich individual speculators, shadow banks like hedge funds, and other financial institutions who cleverly and quietly moved their investments around in the pre-knowledge and anticipation of the ECB’s announcement, will now reap big capital gains profits immediately from Draghi’s QE. And they will continue to do so in the days to come as Eurozone stock and bond indexes continue to rise.

What the ECB announcement shows, yet again, is that QE programs and policies are always and primarily about boosting financial investors’ incomes.

QE’s Sorry Historical Track Record

The official ideological cover for QE is that it will stimulate the real economy, lead to investment in real goods and services, create jobs, and raise wage incomes.  But there is absolutely no empirical evidence or support for such claims anywhere in the world where QE has been introduced since 2008. Not in the United States. Not the UK. Not Japan. Nor will there be in the Eurozone.

In April 2013 Japan introduced its own massive QE money injection, an enormous 200 trillion Yen program, equal to around US$1.7 trillion. Its stock market shot up 70 percent immediately. But real investment continued to slow and real wages continued to fall in 2013-14. The Abe government today, nearly two years later, continues futilely to exhort Japan employers to raise wages. In reply, however, they keep ‘thumbing their noses’ and saying ‘no way.’ Nor did employment levels change in Japan in the wake of QE. And the economy a year after QE was introduced then slipped back in early 2014 into its 4threcession since 2008.

But what about inflation, some ask? Doesn’t massive money injections lead to inflation? Only if you’re a neoclassical economist and believe the myth. In so far as the magic 2 percent national inflation goal is concerned – i.e. the ‘target’ and presumed indicator of QE success – after a recent high of only 1.7 percent inflation Japan recently lowered its estimate of annual inflation to 1 percent. Japan once again is on its way to the chronic deflation that has plagued its economy for decades.

The UK introduced a US$600 billion dollar equivalent QE in 2009-12. Its policy set off a financial asset bubble in its real estate sector – i.e. stimulated property-based financial asset inflation. UK real estate inflation bubble then QE sucked in more foreign capital to speculate in London and the surrounding housing and commercial property markets, pushing its financial asset bubble further. But wages and job creation lagged. And now even the UK real estate bubble is receding, and UK economic growth rates once again. But London bankers did well and capital gains income rose, from property speculation in particular.

If there was any doubt that the primary purpose of QE programs is to promote financial asset markets and capital gains from asset inflation, one need only look at the USA during its massive US$3.7 trillion QE money injection program from 2009 through October 2014. The USA version of QE came in three iterations, QE1, QE2, and QE3 – the latter initially a US$85 billion a month purchase by the USA central bank, the Federal Reserve (Fed), of government bonds as well as near worthless sub-prime mortgage bonds from investors caught holding the bad debt in 2009.

The direct correlation between QE money injections by central banks, and the subsequent boom in financial market profits, is revealed in the highly correlated surge in USA stock prices with each of the three iterations of QE in the USA since 2009. With each QE announcement in the USA since 2009, stock markets took off. When spending for each QE was completed by the Fed, stocks retreated. That led to another QE, another take off, and another retreat. Stocks continued to rise through 2014 until QE3 was concluded, and have leveled off since—as capital flows from emerging markets and Europe flowed back into the USA replacing the QE injections.

The following graph tells the story of the direct correlation between QE and record stock market gains for wealthy investors. And it’s a story replicated across multiple financial markets in the wake of QE:

With QE1 the USA central bank justified the trillions of dollars it gave to investors, shadow bankers, and speculators by claiming QE would generate economic recovery in the USA. But USA economic growth rates throughout the QE1-2 period only rose at an average annual GDP rate less than half of normal. Periodic surges in quarterly GDP were followed by quarterly collapses of GDP on three separate occasions.

With the advent of QE3, the Fed changed its tune: More QE would reduce unemployment and create jobs. Unemployment in the USA came down, but due largely to 5 million workers giving up on finding decent paying work and dropping out of the workforce. And jobs that were created were mostly part time, temporary, and thus low paid jobs. 60 percent of the jobs lost after 2009 were high paid; 58 percent of the jobs created were low paid. So wage incomes continued to fall during the QE period. Real median wage incomes dropped 1-2 percent every year during the QEs in the USA. So much then for justification of QE not only as a means to generate economic growth, but also as a job creator and a way to raise wage incomes.

By 2014 central bankers abandoned pretenses that QE had anything to do with generating real growth, reducing unemployment or raising wages. The remaining justification the argument that QE raises the general price level to a 2 percent target and thus prevent the slide into deflation.

But the historical record here refutes that justification as well. Japan’s price level is back to 1 percent and falling, despite a US$1.7 trillion QE injection. Prices are slowing again in the UK. And even in the USA, at the end of 2014 and after US$3.7 trillion QE, prices for goods and services slipped to their lowest level since the 2008-09 crash. Consumer prices slowed to 0.4 percent in December 2014, and only 0.8 percent for the entire year. Producer prices were zero for the year. The declines, moreover, were across the board and not due only to falling oil prices.

What the experiences with QE in the USA, UK and Japan all show conclusively is that QE clearly stimulates prices for financial assets of all kinds, thus boosting capital gains and capital incomes for the 1 percent and their corporations.  But QE has virtually no net effect on the prices for real goods and services or the slide toward deflation. In fact, an argument can be made that QE redirects money into financial speculation – at the direct expense of investment that would otherwise create jobs, potentially raise working class wages, or raise the price level for goods & services.

Draghi’s announcement of the Eurozone’s QE last week was packaged with the same old false ideological claims, justifications, and cover for the real goals behind QE. QE does not stimulate growth or recovery, will not create jobs and raise incomes for most, and will not save anyone from the bogeyman of approaching deflation. It boosts financial asset prices, the capital incomes of the finance capital elite, and leads to destabilizing financial asset price bubbles.

How the Eurozone QE Will Make Things Worse

The Eurozone’s QE will not only make more money for investors, shadow bankers and speculators, but will actually make things worse – especially for working classes.

Not only will it divert investment into more financial market and financial asset speculation, it will reignite a global currency war, which shows signs of already beginning. And that will eventually mean slower growth, fewer jobs and less wage income as global trade slows even further.

Even before the Eurozone’s official announcement, in what will eventually be recognized as the signal for a new global currency war, the Swiss National Bank, the central bank of Switzerland, preempted the Eurozone by allowing its currency to rise 20 percent in order to protect its wealthy global investors who use Switzerland as a tax haven and a money laundering outlet.

More generally important, the Eurozone’s QE may set off an intensification of a global currency war, in the form of competitive devaluations by other countries of their currencies. QE injections cause an almost immediate decline in the currency exchange rate of the economy in which it is introduced. That currency devaluation can lead to more competitive exports for the economy – or so it is reasoned theoretically. But only for a short period. QE does reduce the currency’s value vis a vis other currencies – but only temporarily because every economy can play the ‘competitive devaluation by QE game’ and eventually does.

The USA and UK gained a brief advantage in exchange rate terms, and thus their share of global exports, when they initially devaluated by QE back in 2009. The USA subsequently boosted its manufacturing exports for a while as a result. Similarly, the UK’s lower currency prompted foreign investors to send their capital into London property markets. Japan’s 2013 QE also sharply reduced their currency’s value, boosting exports some but that has since leveled off as China and other Asian economies responded in the same. The Eurozone is now the ‘last cow in the barn’, as they say, to play this devaluation by QE (to gain exports) game.

Up to 2013 the Euro rose continually, reaching a high of 1.35 to the dollar. Euro exports consequently lagged. But now, with the Eurozone QE announcement, the Euro has quickly fallen to around 1.10 to the U.S. dollar and will continue to slide. Euro exports may therefore get a small boost.

But there’s bigger problem Draghi and his Euro banker buddies aren’t seriously considering: The global economy and world trade is slowing, so the Eurozone’s QE and devaluation will get, at best, a slightly larger share of an export pie that itself is getting smaller.

Moreover, Japan may respond to Draghi’s move by introducing another version of its QE. And the USA and UK, which were talking about raising interest rates, will now likely delay or even postpone doing so in response to the declining Euro and the Eurozone’s attempt to gain a competitive export advantage from its QE devaluation. Other emerging economies will almost certainly respond by lowering their currencies as well. It’s a race to the bottom.

Thus it is likely that Draghi and the Eurozone have not only launched a QE but another currency war as well—a series of competitive devaluations by central bank money injections that will have decidedly negative effects on an already slowing real global economy and global trade.

Competitive devaluations by whatever means are always contagious and dangerous desperate acts. Competitive devaluations in the 1930s, for example, contributed significantly to the depth and duration of the great depression of that decade. The 1930s devaluations were by government declaration. Today competitive devaluations are different and usually take two forms: One is to lower business costs and prices by cutting labor wages and benefits. Spain has enacted that kind of ‘de facto devaluation’ with some success in stimulating its exports, but only at the expense of Spanish workers’ wages. Italy has been trying. France has plans. All three are planning to introduce more ‘labor market reforms’ to continue the effort of competition by labor wage reduction. But all the Euro currency area benefits by the QE-induced reduction of its currency – even if only for a short lived period until others respond.

The QE-Labor Market Reforms Connection

It is interesting to note that Draghi himself when announcing QE also called for more structural reforms (aka labor market reforms or wage reductions). German bankers and politicians have been calling for such reforms as well.

In other words, the debate in Europe is whether to subsidize exports by wage reduction or by QE – or both. It appears now the answer is both, as they test to see which works best.

Whichever approach, competitive devaluations represent a ‘beggar your neighbor’ policy. Let’s grow at the expense of the exports of others by stealing their share of world export trade. That approach also reveals the growing desperation among capitalist economy policy makers and central bankers to keep their own economies growing by any means.

Today no longer are all boats rising in the global economy as a result of growing real investment. With the shift to financial asset investment and speculation worldwide relative to real asset investment – a key trend in the 21st century global capitalist economy – as real investment declines and real growth in turn slows, capitalist economies are turning increasingly toward stealing other countries’ growth. That’s what competitive devaluations are all about – whether by fiat declaration, as in the 1930s; by compressing workers’ wages to lower export prices, as had been occurring since 2010; or by QE-precipitated currency exchange rate manipulation. The Eurozone’s recent QE will ratchet competitive devaluations and currency war by means of QE up yet another level.

Structural and ‘labor market’ reform is mostly about taking back workers’ share of the existing economic pie. Currency wars in the form of competitive devaluations by QE is about inter-capitalist fights over who gets how much share of a more slowly growing or shrinking economic pie. But the fact that Eurozone’s Draghi, German central bankers, and Euro politicians in general see the need to intensify both pie fights at the moment is testimony to a growing realization, and desperation, that the global capitalist pie is not growing as it used to, nor likely will it for anytime soon.

Jack Rasmus is the author of the forthcoming book, ‘Transitions to Global Depression’ by Clarity Press, Spring 2015, and the preceding ‘Prelude to Global Depression’ and ‘Obama’s Economy’, by Pluto Press, 2010 and 2012. His website is:

Jack Rasmus is author of  ’The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, Clarity Press, January 2020. He blogs at and hosts the weekly radio show, Alternative Visions on the Progressive Radio Network on Fridays at 2pm est. His twitter handle is @drjackrasmus.