24 Jan 2015

Another Open Letter to Mario Draghi, president of the European Central Bank

Dear Sir,

Last thursday, you announced that the ECB will create €1.1 trillion and use the money to try and breath some life into the moribund Eurozone economy.

It's clear that being the president of the ECB gives you phenomenal power - power that you had already used back in December 2011 and Februay 2012 when you also created over €1 trillion that you provided to the Banking sector in the hope that it would have a positive effect. I presume that, given the current situation, we can all agree that your previous injection of €1 trillion didn't really fix the problem.

I have many questions for you.

The most important one asks whether your proposal is really the best way to use €1.1 trillion of money creation.

The Eurozone has 330 million inhabitants. That means that you could have used the same amount of ECB money to put 3300€ into the pockets of every man, woman and child in the Eurozone.  That's 15,200 euros for a family of four. Just imagine how much stimulus to the Eurozone's economy would be provided by giving households a direct cash injection of that amount! And the amount of debt reduction that you could have allowed.

I imagine that you will say that putting that much money in peoples' pockets would produce Zimbabwe style hyperinflation, although as I presume you know perfectly well, when people pay off their debts to banks, the "money" just disappears. It could not cause inflation, and will have the effect of reducing the amount of assets held by the banks. That is good news for everyone - including the Banks.

But lets assume that you are being told what to do by the Germans who remain obsessed with the need to avoid a repeat of the Weimer republic. And it's true that pumping €1 trillion in one step could be a bit risky.

So, why not do it gradually. You have specifically said that you will be injecting €60 billion every month until at least September 2016. Divided by 330 million, that is 182€ per person per month - 728€ for a family of four. That is significantly more that the current minimum wage in several Eurozone countries, as you can see from the following table that I compiled using publicly available data.
Just imagine. With the same amount of money that you are propopsing to create every month, you could provide a guaranteed basic income for a family of four that was above the wages paid in austerity-crippled counties like Greece, Portugal and Spain.

Are you still sure that your way is the best way to use all that money?? Where are the arguments showing that your method would be better than directly putting money in peoples' pockets?

OK. So you don't like the idea of giving citizens money directly. So let's look in more detail at what you propose to do.

At least some of the €60 billion you will be pumping into the economy is supposed to be used to buy up bonds on the secondary market. I suppose that is not completely useless. It would mean that you should be able to stop interest rates on public sector debt going through the roof like they did in January 2012 when the Greek government ended up having to pay 25.91%. They would have done as well paying for everything with a credit card.

But the fact is that the real problem is that Eurozone governments are all massively in debt. At the  end of 2013, public sector debt in the Eurozone was over €9 trillion. And the interest payments on that debt totalled €278 billion - a massive drain on public resources because these interest payments have to be paid with tax-payers money. Indeed, if you add up those interest payments for the 18 years from 1995 to 2013, the total reaches a colossal €5.16 trillion - over 57% of all public sector debt.

From this, it follows that allowing governments to pay less interest on public sector debt would indeed be a good thing. But, if I understand correctly, your proposal to pump €60 billion of newly minted ECB money into the financial markets isn't restricted to buying up bonds. I believe that you have set things up so that you can buy just about anything that the financial sector wants to get rid of. A bank that had a whole pile of not very good assets, could potentially swap them for some real ECB money. Does that make sense?

Who gets to decide what to spend the €60 billion on? And with what criteria?

Personally, I would recommend the following simple and clear proposition. The €60 billion should ONLY be used for buying bonds of the different Eurozone countries. We don't want your money going to buy up any old rubbish - however much the Banks would like to get rid of it.

Secondly, I propose that you should buy up bonds for each country simply on the basis of population size. Germany  has roughly 25% of the population of the Eurozone. So 25% of the €60 billion should be used for buying German bonds, 19.6% for French bonds and so on. This was a suggestion that I originally made in a Youtube video calle "How Eurozone countries could fix the global economic crisis" published in August 2012, and which has been seen by over 600 people.

Anything else would mean that you would be able to use the bond buying process to put pressure on governments to implement austerity - either they comply with your directives, or you don't buy their bonds. I suspect that many Eurozone citizens are prepared to put up with more intereference from the Troika in their governments' decisions. No doubt we will see just how strong this resentment is when the Greeks vote this weekend.


  1. Hi Simon,

    In support of your blog, I'd like to compare the QE practice with being blindfolded and throwing darts around hoping to accidentally hit some dartboards, whereas we know exactly which dartboards must be hit in which fields, if we only allow our eyes to be opened.

    I cannot understand that money is kept so tight in the fiscal world and so excessively available in the monetary world, it doesn't make sense. I would think the main priorities of QE should be fighting the European debt crisis and stimulation of the economy. Could you please comment the following analysis?

    I agree a simple distribution of newly created money according to population size is a good way to go. Indebted countries could choose to do what they think is best: buy back their own bonds and put them into the shredder, with two effects: a relief of interest rates and a direct reduction of debt. Wealthier countries could choose to reduce citizen’s tax rates or to launch stimulus programs (infrastructure, flood defence, sustainable energy, whatever), or combinations of all of these. In all cases the richer stimulus money would partly seep towards the poorer countries anyway, due to imports and tourism (or labour demand). Every single created euro would be well spent, and none of the wealthier countries would have to complain ‘to have paid for the Greek’. At the same this would restore the dignity and sovereignty of all Euro-countries, and bind them together at the same time. I would create a common European ground to act, instead of driving partner Euro-countries apart by demanding bilateral guarantees for a growing bowl of poisonous indebted wine, that’s happening now! We already see the negative political consequences.

    In our times of deflation, the inflationary effect of such program would be very limited, but maybe not zero. But a little inflation is one of the aims of the ECB! Not by blowing up stock markets or housing markets again, but by relieving real countries and stimulating
    the real economy. So all of this makes sense and fits together. The program would
    be temporary, the newly created money should not be regarded as a steady income
    for the countries’ budgets. A soon as inflation gets to its limit, the program
    can be temporized or halted, but it will not happen before the economy gets
    rolling again. And as soon as deflation is in sight again, the medicine could
    be used again. Slowly debt-based money would be replaced by sovereign money.
    The ECB must remain independent in this.

    The non-Euro countries could do this for themselves or be tempted to join the Eurozone.

    If we want our society to be more wealthy, then let’s start to be more wealthy! It seems to easy to be possible, but we all have forgotten that economy is not about money. It is about goods and services! Money is only a medium. If demand and supply are both available in a society, but cannot meet due to lack of money, then there is a serious system failure. It must be fixed. Of course, this is not all, economic reforms are
    necessary in some (most) regions, but the monetary policy should support and
    not frustrate these processes.

    Here is a very accessible presentation by Ben Dyson about QE in the UK. It is very applicable for the Eurozone as well. I'm sure you know it already Simon, but some of the readers might not have seen it yet:


    There is much more to say to this, but Simon has already done so… Simon, you won’t probably agree on every detail, but I’m interested to hear your comment.

    Keep on writing Simon! I love your well documented blogs. I’ll keep reading.

    Douwe Meijer

  2. Hi Douwe, I think that we are pretty much in agreement on everything. The fact is that there are loads of options that could be considered. But we are forever being told that austerity is the answer, and that the markets know best. No, what's needed above all is an open debate.

  3. The majority of politicians and citizens are stuck in the one-dimensional way of thinking creating the dilemma between two evils: either austerity or soaring debt and interest burdens. In this cramp I don't blame people to believe in austerity. And I believed so myself for a long time. Where on earth during all those years have been the economists to educate the policy makers how the system really works? And where are they now?

  4. Indeed. And if you look at my latest posts showing that Global debt has now soared to $199 trillion, and yet the total money supply is only $78 trillion, the root of the problem should be obvious to anyone who thinks about it for 10 seconds. We cannot possibly pay off the debt. Not the Greeks, not the French, not even the Chinese.

    There really is only one option. Scrap the process by which new money is created as interest bearing debt. Of course, the people who have been benefitting from the current system will fight like crazy to keep it going a bit longer. But they don't have a leg to stand on. It is quite simply totally stupid.