Gold News

QE Inflation? Of Course There's None

None outside stocks, bonds, real estate...
 
WELL, that was worth waiting for. Not, says Tim Price on his blog, The Price of Everything.
 
Future generations are unlikely to ask, 'Where were you during the ECB's announcement of QE, daddy ?' Primarily because
  1. Much of the detail of the stimulus was leaked the day beforehand; and
  2. The real event of January was the Swiss National Bank's capitulation in capping the franc's peg to the Euro.
Axel Weber's assessment of the futility of Eurozone QE is surely sufficiently articulate: a central bank is attempting to solve problems that can only be resolved through government action.
 
A central bank by definition is limited in scope to the monetary sphere. What is required is tough love in the economic policy sphere – in France, in Greece, and elsewhere.
 
Europe lacks the political and fiscal unity for Mario Draghi to do anything other than play games with the printing press and with a load of poor quality debt offering dubious yields. Central banks are not magicians, even if they behave like them.
 
And the ECB is coming late to the party in any case. In the words of Colin McLean:
"The US and UK were dealing with a cyclical downturn, not deep-seated structural failure. In the Eurozone, QE might further delay the need for structural reform."
Financial historian Russell Napier last week discussed the Swiss National Bank's surprise decision to abandon its own currency peg:
"The Swiss National Bank (SNB) failed to 'fix' the exchange rate between the Swiss Franc and the Euro. The simple lesson which investors must learn from this is – central bankers cannot fix very much. The inability of the Swiss National Bank to 'fix' the exchange rate will come to be seen as the end of the bull market in the omnipotence of central bankers."
He went on to highlight some of the other things that investors erroneously believe central banks to have 'fixed':
"Central bank policy is creating liquidity."
Wrong – the growth in broad money is slowing across the world.
 
"Central bank policy is allowing a frictionless de-gearing."
Wrong – debt to GDP levels of almost every country in the world are rising.
 
"Central bank policy is creating inflation."
Wrong – inflation in most jurisdictions is now back to, or below, the levels recorded in late 2009.
 
"Central bank policy is fixing key exchange rates and securing growth."
Wrong – in numerous jurisdictions, from Poland to China and beyond, this exchange rate intervention is slowing the growth in liquidity and thus the growth in the economy.
 
"Central bank policy is keeping real interest rates low and stimulating demand."
Wrong – the decline in inflation from peak levels in 2011 means that real rates of interest are rising. The growth in demand in most jurisdictions remains very sluggish by historical standards.
 
"Central bank policy is driving up asset prices and creating a positive wealth impact which is bolstering consumption."
Wrong – savings rates have not declined materially.
 
"Central bank policy is creating greater financial stability."
Wrong – whatever positive impact central banks are having on bank capital etc. they have failed to prevent the biggest emerging market debt boom in history. That boom is particularly dangerous because either the borrower or lender is taking huge foreign exchange risks and because a large proportion of that debt has been provided by open-ended bond funds which can be subject to runs.
At last week's press conference to announce the ECB's first iteration of QE (if history is any guide, there will be more), Mario Draghi claimed to see no evidence of inflation whatsoever.
 
Perhaps Mario Draghi lets someone else manage his property, stock and bond portfolio.
London-based director at Price Value Partners Ltd, Tim Price has over 25 years of experience in both private client and institutional investment management. He has been shortlisted for the Private Asset Managers Awards program five years running, and is a previous winner in the category of Defensive Investment Performance. Tim regularly shares his views on his blog, The Price of Everything.
 
See the full archive of Tim Price articles.

 

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