(October 4, 2012) — Quantitative Easing (QE), introduced by central banks to support some of the largest developed economies, is hurting more than just those counting on higher interest rates – and could lead to bigger social problems, according to some worried industry thinkers.
The third round of QE announced by the chairman of the United States’ Federal Reserve has failed to offer a sustained equity market rally, according to analysts at fund manager Lombard Odier. The asset manager said that since Bernanke announced the potentially unlimited printing of new money to buy government bonds, investors “seem less confident of the ability of liquidity to life equity market, rightly pointing to its diminishing effect over time and to its demonstrated lack of impact on the real economy.”
Lombard Odier said acclimatisation and a higher starting point for equity markets meant the positive influence QE had on boosting share prices became limited.
“Given the severe structural issues, being overweight equities today on the basis of liquidity only is clearly more difficult to justify,” a note from the asset manager said.
However, Lombard Odier added that at least equities were making positive returns, unlike most “safe haven” government bonds, which are often offering negative yields, and cash as interest rates are trailing inflation in many developed markets.
Taking a step yet further in criticising QE, Dylan Grice, an analyst at Societe Generale who provides an “alternative view” for the French bank, said the action could lead to civil unrest.
“I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for…). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations,” Grice said in a note to the market this week.
His thesis: economic activity is at its basic level an exchange between strangers, and therefore depends on a degree of trust. Money is the agent of the exchange and therefore it is an agent of that trust. Debasing money therefore debases trust and will lead to debasement of society.
“So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer?” the note said. “Inflation of the CPI might be a consequence both seen and measurable. A broad inflation of asset prices might be a consequence seen, though not measurable. But what about the consequences that are unseen but unmeasurable and are all the more destructive for it? I feel queasy about the enthusiasm with which our wise economists play games with something about which we have such a poor understanding.”
Grice outlined how QE serves to depress purchasing power of the masses “by stealth”, which in turn would affect society as people would be suspicious of the disappearance of their wealth by no obvious means. He sets out many historical examples – from the Romans, through the French Revolution, to Germany in the last century – to show how the actions of the central banks could bring society to its knees.
“Inflation inverted the efficacy of correct behaviour. It turned the ethics of thrift, frugality and notions such as working hard today to bring benefit tomorrow completely on their heads. Why work today when your rewards would mean nothing tomorrow? What use [was] thrift and saving? Why not just borrow in depreciating currency? Those who had worked and saved all their lives, done everything correctly and invested what they had been told was safe, were mercilessly punished for their trust in established principles, and their inability to see the danger coming.”
He concludes that central banks were unlikely to stop “playing games with money”, and although he worries about a “Great Disorder”, he said it would mean there would be safe havens in which to invest.
Societe Generale was at pains to insist this is not the bank’s house view.