Investment bank Natixis believes the European Central Bank will have to restart Quantitative Easing (QE).
Towards a reopening of QE in the euro zone?
This is the title of a research note published by Patrick Artus on November 13. “QE” is short for Quantitative Easing. This linguistic esotericism of banker means to turn the printing press.
The introduction of paper gets straight to the point:
“In the pessimistic scenario in which productivity growth remains weak in the euro zone, growth will be insufficient in the coming years to visibly reduce the public deficit in France, Spain and Italy. To avoid the return of a crisis of sustainability of certain public debts, the ECB could then be obliged to reopen QE. »
For the director of research at Natixis, “if labor productivity does not recover, potential growth will be low”. And “the fact that the real interest rate is higher than potential growth” will result in significant public deficits.
“Given the weakness of growth and the level [élevé] interest rates, it will be very difficult to ensure the sustainability of public debt. France, Spain and Italy will therefore experience a risk of a public debt crisis. »
In other words, government borrowing rates will rise so high that the ECB will have to intervene by purchasing sovereign debt again.
Productivity ?
Labor productivity is a measure of the productive efficiency of labor. Typically, humans increase their productivity with machines. The more machines a country has per capita, the more productive it is.
But machines aren’t everything. They need energy to function. Especially oil, which is essential for transport machines (trucks, boats, trains, etc.) without which nothing would be done.
By the way, boomer Patrick Artus prefers to blame the “ loss of perception of the meaning of work among young people.” “The insufficiency of investment in new technologies” is also in question according to him. And then also ” the ageing of the population “the reason being that the share of resources allocated to retirees is by definition non-productive.
While waiting for nuclear fusion and immortal batteries, the fact is that Europe is finding it increasingly difficult to afford its oil. EU black gold imports are in receding since the peak of conventional oil in 2006. This is the real, physical origin of the drop in productivity.
Less energy (or more expensive energy) = fewer machines working = lower productivity (production per capita) = lower standard of living.
The system being what it is (a monetary ponzi), the fall in the standard of living is manifested by an increase in inflation and wages which do not follow.
Clearly, it is our capacity to produce energy that will be decisive for the decades to come. And in particular our ability to do without oil.
The Shift Project made the calculations from the best existing database (Rystad) about world oil reserves. The observation is implacable.
More inflation in the pipes
For the Shift Project, “the probable decline by 2030 in the production of countries currently supplying more than half of the oil consumed by the EU risks causing significant constraints on its supply”.
More concretely, the total volume of production from current sources of EU oil supply could be 12% lower in 2030 than in 2019. And by 50% by 2050. These sources being in order of importance : Russia, Iraq, Saudi Arabia, Norway, Kazakhstan, Nigeria, Libya, Azerbaijan, Iran, United Kingdom, United States, etc.
It should now be remembered that the Fed initiated QE at the same time as the peak in global conventional oil. Let’s also not forget that the United States abandoned the Gold Standard just a few months after its peak oil production (1970).
It was the Fed’s debt purchases that allowed banks to reallocate their funds to the Shale oil industry. Without printing money, the United States would not have been able to escape the subprime crisis so easily. This is the analysis that Michel Lepetit makes in this open letter to Fed governors.
In short, energy scarcity promises a decline in productivity which will necessarily be accompanied by ever-larger budget deficits. We will therefore have to go into more debt, which will in turn force central banks to print.
Given recent US debt issuance, it is not impossible that QE will return sooner than expected:
We move into another world. Gone are the days when oil production kept increasing. From now on, production will continue to decline, taking productivity with it.
This will inevitably result in massive inflation for which we must prepare. For example, thanks to bitcoin which, according to Michael Saylor, will ultimately be worth 10 million dollars…
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