The end of QE? | FT Alphaville

The end of QE?

Marc Ostwald at Monument Securities has spotted that an important theme is developing: a rise in the number of warnings about QE suspension and QE exit.

As he noted on Thursday regarding the recent warnings from the BIS and the IMF:

To my jaundiced eye, I would have to say that the warnings below from the BIS and IMF within one hour of each other today on QE, suggests that this is the beginning of the end for QE! Am not sure that everyone else will share that view, but this cannot be a simple coincidental warning shot that has no material consequences – watch this space!

He was referring to this Reuters snap:

IMF: CENTRAL BANK LOSSES FROM EXIT COULD BE SIGNIFICANT SHARE OF GDP UNDER SOME SCENARIOS, BUT WOULD HAVE MINIMAL ECONOMIC IMPACT

We also had this from the BIS (also via Reuters):

LONDON, May 16 (Reuters) – Major central banks should not delay winding in their support programmes, Jaime Caruana, head of the Bank for International Settlements (BIS) said on Thursday. Caruana, whose organisation is an umbrella group for the world’s central banks, said there was now an increasing argument for major central banks to start scaling back the support they have given to the global economy over the last five years.

“It would be better that it (reeling support in) is done sooner rather than later,” he said an event organised by OMFIF. “The balance of risks of prolonged very low interest rates and unconventional policies is shifting. The costs are growing in relation to the benefits.”

A few quick thoughts.

As FT Alphaville has been arguing for a while, there is now a notable, if not dangerous, diminishing return associated with any more quantitative easing.

More QE in any capacity is thus simply not an option.

All the central bank can do at this stage is go down the pure helicopter, negative rates or the digital cash issuance route — and none of these options come without risk, or paradigm changing significance.

Luckily, the QE and Jedi mindtricks we have had already may have been enough to get us out of the danger zone. For the most part they’ve added liquidity while propping up short-term rates at zero thanks to policies like interest on excess reserve (which were a form of sterilisation that helped to slow down the crowding out effect of liquidity on safe assets, dodging fully negative rates).

But we are by no means out of the woods yet.

Employment is still to recover completely. Corporates are still not investing. And commodities are now on the decline. It is for this reason that QE exit is unlikely to have inflationary consequences.

In fact, recovery has been almost fully focused on asset classes like equities, risky debt, housing, and corporate margins.

It is, in a sense, as if an economic reset has taken place focused on the elimination of jobs, the easing in commodity supply and the contraction of output.

Just because equities and housing have recovered — because enough money has flown into these sectors to bring them back on track — doesn’t make-up for the fact that a large part of society (a lot of it on the youth side) that has been completely disenfranchised from the economy.

QE may have done its job as far as propping up the financial sector goes but… for the economy to really recover, and for it to avoid another massive shock, there is still an urgent need to redirect much of the liquidity that’s been created — currently chasing risk assets — to those frozen out of the economy more permanently.

It may consequently be time to start talking about concepts like basic income, digital e-money or debt jubilees.

The risk of not doing so is unfortunately the risk of permanently splitting the economy into two distinct parts. One, the financialised economy that owns most of the productive assets; the second, the collaborative shadow economy which is now working furiously at making the most of what it’s got.

Related links:
A new type of growth is emerging – FT Alphaville