Greece's Varoufakis Warns On QE But Doesn't Seem To Understand It

Forbes 

Tim Worstall

Contributor

http://www.forbes.com/sites/timworstall/2015/03/14/greeces-varoufakis-warns-on-qe-but-doesnt-seem-to-understand-it/

The Finance Minister of Greece, Yanis Varoufakis, has warned that the ECB’s quantitative easing program isn’t going to do much for the eurozone economy. It’s just going to fuel a boom in the stock markets. This won’t do much for real investment in the currency block. There is a truth here, of course there is. QE will indeed produce a boom in both the stock and bond markets. Yet this is what seems not to be understood: this is the point of QE, this is how it actually works.

Here’s what he said:

The European Central Bank’s bond purchases will create an unsustainable stock market rally and are unlikely to boost euro zone investments, Greek Finance Minister Yanis Varoufakis warned on Saturday.

….

“QE is all around us and optimism is in the air,” Varoufakis told a business audience in Italy. “At the risk to sound the party pooper … I find it hard to understand how the broadening of the monetary base in our fragmented and fragmenting monetary union will transform itself into a substantial increase in productive investments.

“The result of this is going to be an equity run boost that will prove unsustainable,” he said.

Well, yes and no, yes and no. The point being that the way that QE works is by raising those stock and bond prices.

Start from the most basic assumption: investors would like to see a return on their investments. Excellent. So QE increases the price/reduces the return on extant investments. This reduces the willingness of investors to hold those extant investments and makes the returns on new projects (which will, of course, be unaffected by the rise in the price of extant securities) look more attractive. We have thus changed the relative values of old and new investments and we would expect there to be more new investments.

Do note that this isn’t an aberration, this is how QE is supposed to work. So, complaining that QE is going to drive stock and bond prices up is rather betraying that one isn’t really quite sure about what QE is or is supposed to be doing.

In other Greek disaster news we have another portmanteau word to play with:

In other Greek disaster news we have another portmanteau word to play with:

Greece’s harshest critic, German Finance Minister Wolfgang Schaeuble warned that a disorderly “Grexident” — playing on the terms “Grexit” and an accident — that could push Athens out of the euro could not be excluded.

The Greeks are certain that they’ve got a plan to make sure they don’t leave the euro by accident, that Grexident. No one else is quite as sure as they are which is a tad worrying.