The unproven long-term use of ongoing doses and overdoses of QE, along with its necessary pre-condition of ultra-low interest rates, may have saved the G20 banks and government deficits, but there are some nasty discernible side effects too.
First there were the buoyant stock markets despite the five-year long Great Recession and despite corporates sitting on piles of uninvested cash, just salting it away until confidence in the real economy becomes tangible. In fact, stock markets went so high on the back of QE, and then just stayed there, that the hedge funds couldn’t find much to turn a buck on, and their profits slumped.
Second, there was no contraction in UK house prices, as UK mortgagors enjoyed lower interest rates than ever before, despite the long recession and inflation advancing at 2.5 per cent pa – officially, at any rate, making prices rise by 15 per cent or so for the duration, while wages stood largely still. Now the new Governor of the Bank of England has been forced to say he will react to any new housing boom and bust.
Thirdly, and more importantly, was the global effect, which is now becoming apparent as the end of QE comes into sight, as Ben Bernanke gets ready for retirement next April. The sudden realisation that the massive monetary loosening, especially by the US, will shortly be withdrawn has sent shudders through the BRICs as they contemplate severe monetary tightening. The Bernanke largesse wasn’t just reflating the US economy, but the global economy too.
The BRICs along with the SATs – South Africa and Turkey – are all feeling the monetary squeeze and contemplating higher yields, wondering how to halt capital flight and shore up their currencies at the same time, which seem to be mutually self-defeating objectives. It would undoubtedly push the emerging economies, already in various degrees of reverse gear, into deeper retrenchment, as monetary climate tightens as interest rates rise.
China, with its foreign reserves, and Russia, with its gas, have room to manoeuvre. Brazil and India are not in those happier circumstances. India, for example, has seen the rupee collapse by 25 per cent since Easter; it has a current account deficit of 4.8 per cent of GDP, and needs capital inflows to cover its short-term external debt, just as the hot money heads out of town. So taxes will have to rise, just as the economy splutters.
And don’t even ask a saver or a pensioner how QE has sucked their income down to near-zero. The defenceless savers and pensioners are rendered once again into the usual, same-old ‘Buggered Battalion’ of the conned ones.
This is not the way capitalism was meant to work. And the central bankers, who lost control back around 2005, are still struggling to get back into the saddle of the bucking bronco of their own making. It started with interest rates being left too low for too long, and that’s the way it still is.
For QE, read the endless supply of inflationary fuel to finance the greed of the pinstriped moneymen and their next Boom and Bust Big Dipper. Enjoy the ride! Hang on tight!