The Quantitative Easing Epidemic ContinuesJames Cordelaine
I haven’t seen any news on the topic, but I’ll venture to guess the best job in the world right now is that of a bond salesman. And you know life is good if you’re a bond salesman with only one account – a country, any old country. That one account, at any rate of commission, will keep you in Bentleys, diamonds and luxury cruises till it dawns on central bankers how the global economy actually works (or isn’t working).
That’s because the world’s central banks are currently dishing out two hundred billion dollars every month in bonds for economic stimulus. They’re on track to exceed the monthly amount of central bank bond purchases during the heart of the 2009 financial crisis.
This is especially disturbing since an emergency measure that was intended to be an economic stop-gap during a crisis has now become a regular routine. Long ago policymakers cut interest rates to zero, with no discernible results in sight.
But the bond purchases keep coming. If bonds were drugs, the central bankers who prescribe them would be candy men. Alberto Gallo, a fund manager at Algebris Investments, sees us as being in a state of “QE Infinity.” We’re stuck smack in the middle of low growth, low interest rates, and central bank policies that stimulate zilch.
The current perpetrators of this monetary mess are the Bank of Japan and the European Central Bank, at about 10 trillion yen ($96 billion) and eighty billion euros ($88 billion) a month, respectively. Not to be outgunned by the big boys, the Bank of England announced last week the economic after-effects of Brexit are forcing it to load up for some more rounds of quantitative easing. It will add an additional sixty billion pounds ($78 billion) to its arsenal of government bonds over the next six months, then reinforce this purchase with ten billion pounds of corporate debt.
But central bankers may as well be firing bullets into air. They admit they’re only buying time until they come up with a better idea for jump-starting their respective economies. JPMorgan analysts have issued a cautionary research note, in fact, that fiscal policy will retard growth before it stimulates it. This happened between 2010 and 2015 when government policies to reign in on spending inhibited global gross domestic product, thus slowing stimulus measures put in place by central banks.
All the while, some experts vigorously argue that quantitative easing actually disincentivizes business investment. Nobel Prize-winning Economist Michael Spence and former member of the Fed Board of Governors Kevin Warsh claim that QE, by its very nature, persuades business owners to prefer financial assets over real assets.
If you’re a business owner, and you have a choice between easy money or a return over the long-term from building a factory, you’ll most likely jump at the former opportunity. Also, you won’t want your capital investment to remain vulnerable when bankers unroll QE. In an editorial for the Wall St. Journal they write, “The resulting risk-aversion from QE’s unwinding translates into a corporate preference for shorter-term commitments—that is, for financial assets.” In other words, central bankers who administer quantitative easing are treating the economic symptoms, but not fixing the global economy’s overall condition.
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Is there a lesson in all this for private investors? I think so. For one thing, instead of coveting “financial assets,” or paper assets, we can invest in a tangible asset like physical gold, and hang in for a more substantial and long-term return. And we can stop deluding ourselves that there’s a rosy future beyond stimulus measures central bankers readily admit were implemented solely to buy time. No disease was ever cured by a Band-Aid.