QE: The economic peril from which there is no escape
No matter how much we talk about interest rates and inflation, until we get a handle on Quantitative Easing, QE, nothing will improve for the average citizen.
We all know about Reichsmarks and Zimbabwe dollars. For many years, prudent Western economists shied away from printing money because they all understood the devastating consequences of such a foolish fiscal policy, or we did until the Bank of Japan attempted to print money to support its faltering economy in the early 2000s.
You can understand the BOJ a little bit. After decades of growth, Japan had found itself stuck in a cycle of deflation and economic stagnation, and it needed to find something to break this cycle.
Desperate and confident that they could control QE, the Japanese embarked on a buying spree, snatching up government bonds and various assets. The aim was to flood the economy with cash, rev up lending, and reignite spending.
As an isolated case, this might or might not have worked, but the 2008 global financial crisis came along.
Poor economic policies in the US and Europe had come home to roost. Low interest rates and government pressure on banks to give loans to all and sundry had completely backfired, and rather than grasp the nettle and go through the inevitable pain of a massive recession, the FED, The European Central Bank, and the Bank of England decided to adopt Japan's QE strategy, hoping it would provide them with a lifeline.
In coordination, they started to scoop up government and private securities, such as bonds and mortgage-backed securities, with the same aim of driving long-term interest rates down and kick-starting borrowing and spending. Plus, of course, bailing out banks that should have been allowed to go under.
The adoption of QE was a knee-jerk political move rather than a fiscally prudent one. And despite the inherent dangers of going down the same path as Japan, we were told by Bernanke and other Western central bankers that our QE was similar to Japan's, but it would also be different. Smoke screens and mirrors.
Years earlier, Central banks had been set an inflation target 2%, and QE was a very helpful tool to achieve this goal. But while there are numerous good reasons to target such a rate, being obsessed with it when there are so many other factors to consider is a fool's errand.
The other problem, of course, is the political bias and involvement. More importantly, once stupid governments get a taste of spending printed money to fund their political ambitions, it's hard to wean them away.
For the less-knowledgeable public, QE sounded like the saviour of the day, but as time has rolled on, the hidden costs of QE have become evident. And for society as a whole, this policy has had many detrimental effects.
In our investment world, many large HNW individuals benefited from QE. Still, in general terms, one of the worst aspects of printing money is that it magnifies the difference between the wealthy and the average worker. Asset prices became inflated, benefiting the rich, but this caused average workers to struggle to make ends meet.
Indeed, If we look at what happened during the COVID-19 pandemic when QE became rampant, stock markets rocketed, creating numerous billionaires, Yet, at the same time, millions faced job losses.
We also saw some massive asset bubbles caused by QE. Investors were lured into investing on more riskier assets with promises of significantly higher returns (crypto?), inflating prices to unsustainable levels.
But remember, this wasn't the first time. The 2008 crisis was all about people buying property at inflated prices they couldn't afford then suffering when the economic picture changed.
These falsely manufactured low-interest rates are not helpful for pension funds and pensioners. Many of these funds rely on fair interest rates to cover their obligations; this does not happen if interest rates are kept artificially low due to a policy of QE.
Indeed, many workers whose salary increases are linked to inflation have suffered losses because governments use CPI rather than the actual inflation figure to keep their outgoings lower.
And finally, we have yet to see QE fulfil its promise of stimulating real growth. Like pushing a car stuck in the mud, there is a lot of noise but not a lot of movement.
However, I cannot finish without addressing the Elephant in the room: Incapable and corrupt politicians.
As a stand-alone fiscal policy, QE is disastrous for any economy, but put it in the hands of politicians, and it is pure evil.
Once power-hungry politicians have their hands on the printing press, we know everyone will suffer (except the politician and his wealthy cronies). Giving politicians a tool to finance their activities and spend recklessly without raising taxes is madness. QE will always add to inflation and ultimately lead to economic instability.
The problem with this is that today's government can spend with the knowledge that future governments and taxpayers will have to pick up the bill.
Readers will know that since the day Joe Biden walked into the White House, my attitude towards our Western economies has been pessimistic, and my attitude towards investing has been to diversify defensively. That is because a government focusing on spending, to maintain power, when the country is already in insurmountable debt, is a recipe for disaster.
QE must be curtailed and removed as a fiscal tool controlled by politicians.
In all honesty, I think some politicians are coming to this conclusion and rightly so.
But the question remains: what are they going to do next?
The current answer is the introduction of CBDC, something the public neither needs nor wants.
Ultimately, while QE might've seemed like a lifeline during the financial crisis and during Covid, it's high time we reevaluated these strategies, which have done more harm than good. And when we do so, let's not turn a blind eye to those who have exploited their power for personal gain, and rather, get back to some system which doesn't make ordinary citizens continually pay the price of bad leaders.
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