Dear Mr. Berko: Could you please explain quantitative easing in simple English and in terms that I can understand? Because of the new monetary policy in Europe, our nephew, who works as a broker for UBS, believes that most European stocks will increase in value. He has given us a list of seven European stocks: Luxottica Group, from Italy; Banco Santander, from Spain; Titan Cement Co., from Greece; Banco de Portugal; AXA, from France; ING Group, from the Netherlands; and Anheuser-Busch, from Belgium. He feels that these countries stand to prosper most in the eurozone economies and wants us to invest $6,000 in each of those stocks. We would appreciate your comments.
— NN, Buffalo, N.Y.
Dear NN: Quantitative easing is an unconventional form of trickledown monetary policy in which a nation’s central bank electronically creates new money to purchase government bonds. In the U.S., QE opened a monetary cannon, exploding cash into the economy to be used for fixing our airports, water ports, highways, bridges, etc. These shovel-ready jobs could have increased private-sector spending and added about 3 percent worth of inflation to the economy. However, QE supercharged stock and bond prices for the wealthy, crippled the incomes of retirees, discouraged ordinary savers, hammered pensioners and gave massive wealth transfers to bailed-out banks, whose greedy executive committees had pushed the country into the Great Recession. In the process, the rich became enormously richer, and the middle class was royally screwed. The median family income got clobbered. But government’s gift checks to the poor continued flowing.
The European economies are foundering and floundering, and the European Central Bank’s executive board has proposed a U.S.-style quantitative easing solution, which was demanded by our own Federal Reserve. The ECB will begin its first QE round with the purchase of $60 billion worth of bonds every month for at least a year. Because this will be open-ended (some ECB board members are calling for a $2.5 trillion limit), it will certainly be followed by a second round of quantitative easing and then QE3. And along the way, most European equities will prosper because the billions of excess euros will not flow to consumers but be invested in Europe’s stock markets.
For years, the Japanese economy and stock market were treading water in the sewer. In January 2013, when the Nikkei 225 index was trading at 10,800, Prime Minister Shinzo Abe announced a bond stimulus package of 120 billion yen. And 15 months later, the Nikkei was up nearly 90 percent, to 19,000. A Nikkei investment was basically a no-brainer. In November 2010, when the Dow Jones industrial average was at 11,000, the Fed announced QE2 and began monthly bond purchases of $85 billion. And by March 2015, the Dow was trading at more than 18,000, up nearly 70 percent. An investment in one of the 30 industrials included in the Dow was also a no-brainer.
