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Should Investors Be Worried About The Quantitative Easing In Europe?

Last week, the European Central Bank (ECB) announced a huge financial asset-buying programme worth a total of around €1.1 trillion in a bid to resuscitate Europe’s economy. The programme is set to begin in March 2015 with the buying done on a monthly basis, and the ECB’s current plans are for the programme to end by September 2016.

ECB President Mario Draghi also announced that the bank will do “whatever it takes” to ensure that the Eurozone does not fall into depression.

The large scale purchase of financial assets – otherwise known as Quantitative Easing – seems like the preferred solution lately for governments around the world to fix their respective economic ills.

The U.S.’s central bank, the Federal Reserve, started the trend in the wake of the global financial crisis of 2008-09 to help kick-start the American economy. Following in the Fed’s footsteps some years later were policy makers in Japan and the United Kingdom – both nations embarked on their own quantitative easing programs to help “boost spending”.

In theory, quantitative easing sounds like a great idea. Central banks will print more money and use that money to buy up government bonds. Then, the sellers of those government bonds will have the cash and could maybe help transfer that cash back into the economy, through means such as the extension of more loans to businesses (and thereby raising investments).

But, there is also a secondary effect that can be felt from quantitative easing which is very important for investors to note.

Due to the massive amount of money freed up, some of them will have to be invested elsewhere, and this is what can lead to asset prices increasing. Furthermore, due to the ease of transferring money worldwide now, quantitative easing in Europe can have consequences in Singapore and elsewhere around the world.

This is akin to the “Butterfly Effect” found in Chaos Theory; it is said that if a butterfly flaps its wings in New Mexico, it can cause a hurricane in China. That’s of course just a colourful description of what the Butterfly Effect is – and that is, the phenomenon seen in some systems where a small change in input can result in extremely dramatic changes to the output.

This can happen in the financial markets too, where inputs (say Quantiative Easing), could possibly have unpredictable and disorderly consequences.

In a certain way, I think that the effects of Quantitative Easing in the U.S. and Japan has already been felt in the way asset prices have risen rapidly in many Southeast Asian nations. For instance, major stock market indexes in Thailand, Malaysia, and Philippines have all risen to record levels in recent years. Singaporeans would also know how property prices here are like (that is, prices have ballooned!) and it’s the same in China.

This brings me to the question: Will the quantitative easing in Europe taking place soon provide even more fuel to inflate the asset bubble in this part of the world?

I don’t think there are any easy answers. What we do know is that the ECB has already decided to flap its butterfly-wings. The end result – whether it’s a cool breeze we’d get to enjoy or a hurricane we’d have to suffer through – remains to be seen.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in the companies mentioned above