Is QE2 going the same way as the Titanic? Obviously I am not talking about enormous ships here – rather I am referring to the second round of Quantatitive Easing currently being openly discussed by, among others, Central Banks and the Federal Reserve in the US.
The QE2 name it has been given seems tragically appropriate. To nail my colours to the mast (see – another nautical reference), I whole-heartedly supported the first round.
There was no choice other than to see the financial system crumble under the twin burdens of uncertainty and ever-dwindling liquidity. Since then we have seen the vast majority of QE go directly into bolstering the balance sheets of commercial banks (a good thing) boosting capital availability for Proprietory Investment Banking activities (Do I need to call this a bad thing? Have we already forgotten how we got here?) and very little go into boosting the real economy other than by creating a fantasy world where large corporates with strong balance sheets can borrow more at close to zero interest rates while medium-to-small businesses are unable to borrow capital (the very capital provided by our governments) from the banks who have appropriated it.
The recovery is weak – but is in existance. QE2 is not necessary at the moment and would, in any case, be subject to the law of diminishing returns – even if (which I doubt) it were to be modified to avoid the abuses I have just described. We need to keep such a blunt weapon ready against urgent need.
The reaction of markets in the last few weeks has been particularly difficult to fathom. Good news (and there has been some) is a sound foundation on which to base market strength, but the present arguments related to further stimulus frighten me.
In essence the argument goes that we are close to flat-lining economically, with growth around 1% in most sectors.
Large corporate earnings disguise this as the whole post-QE world skews results in their favour and they make up the major indices. To bolster the majority of the economy that does not have these advantages, yet more money needs to be injected (and remember that so little of it reached the right destinations last time) to “help” them. So we are doing so badly that we need more help – and that is a good reason to be bullish – because we are doing so badly?
The words honest and Corporate America may not sit easily in the same sentence, but this is a magnificent exhibition even by the standards previously set. “Please give us more money to help the economy – we will try to make sure none gets as far as its intended recipients, but you have to do this.”
Without divorcing “Real” Banking from Corporate Banking, this will be a spiral that can only end in tears. Ultimately the money pumped in via QE can only be reclaimed by much higher interest rates or depreciation of currencies.
In view of the above I am of the firm opinion that we are heading for the dreaded “double dip” that has been banded about for some time.
By Nigel Goldman